Q4 2023 Kaiser Aluminum Corp Earnings Call
Operator: Greetings and welcome to the Kaiser Aluminum Corporation's fourth quarter 2023 earnings. At this time, all participants are in a list... A brief 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.
Greetings and welcome to the Kaiser aluminum Corporation's fourth quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A brief 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.
Kim Orlando: As a reminder, this conference is being held, and it is now my pleasure to introduce your host, Kim Orlando, from Investor Elite. Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's fourth quarter and full year 2023 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at KaiserAluminum.com. We have also posted a PDF version of the slide presentation for this
Pat as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Kim Orlando Investor Relations. Thank you Ma'am you may begin.
Thank you good morning, everyone and welcome to the Kaiser aluminum fourth quarter and full year 2023 earnings conference call.
If you have 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.
Kim Orlando: Joining me on the call today are President and Chief Executive Officer Keith Harvey and Executive Vice President and Chief Financial Officer Neal West. Before we begin, I'd like to refer you to the first four slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitutes 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 statement, Please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31, 2023, which will be filed on February 23, 2024. The company undertakes no duty to update any forward-looking statements to conform them to actual results or changes in the company's expectations.
Joining me on the call today are president and Chief Executive Officer, Keith Harvey and Executive Vice President and Chief Financial Officer Neal West.
Before we begin I'd like to refer you to the first four slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward looking statements are based on management's current expectation.
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 31st 2023, which will be <unk>.
On February 23rd 2024.
Company undertakes no duty to update any forward looking statement to conform the statements to actual results or changes in the company's expectations.
Kim Orlando: In addition, we have included non-GAAP financial information in our presentation. Reconciliations to the Most Comparable Gap 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 and or cannot be reasonably predicted or provided without unreasonable evidence. Any reference to EBITDA in our discussion today means a diluted version, which excludes non-run rate items for which we have provided reconciliations in. Furthermore, slide five contains definitions of terms and measures that will be commonly used throughout today's presentation. At the conclusion of the company's presentation, we will open the call. I would now like to turn the call over to Keith Harvey.
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, I mean, adjusted EBITDA, which excludes non run rate items for which we have provided reconciliations in the appendix.
Further slide five contains definitions of terms and measures that will be commonly used throughout today's presentation.
At the conclusion of the company's presentation, we'll open the call for questions.
I'd now like to turn the call over to Keith Harvey Keith.
Keith Harvey: Thanks, Kim. And thank you all for joining us for a review of our fourth quarter and full year 2023 results. Moving to slide seven. I'm very pleased with the hard work and dedication of the entire Kaiser team this past year, which enabled us to set the foundation for long-term, sustainable, and increasingly profitable growth in the years to come. Our focused strategy, unwavering execution, and commitment to our customers allowed us to end the year in a solid position with ample resources to implement our growth initiatives. We delivered fourth-quarter results above our expectations with $52 million of adjusted EBIT. Despite continued destocking in some of our markets and inflationary pressures, our efforts to lower costs and improve operating efficiencies are taking hold across the platform. An exceptionally strong aerospace mix experienced during the quarter also contributed to our strong results.
Thanks, Kim and thank.
You all for joining us for a review of our fourth quarter and full year 2023 result.
Turning to slide seven.
I'm very pleased with the hard work and dedication of the entire Kaiser change this past year, which enabled us to set the foundation for long term sustainable and increasingly profitable growth in the years to come.
Our focused strategy unwavering execution and commitment to our customers allowed us to end the year in a solid position with ample resources to implement our growth initiatives.
We delivered fourth quarter results above our expectations with $52 million of adjusted EBIT.
Despite continued destocking in some of our markets and inflationary pressures our efforts to lower costs and improve operating efficiencies are taking hold across the platform.
And exceptionally strong aerospace next experienced during the quarter also contributed to our strong results.
Neal E. West: Performance in the fourth quarter and full year 2023 establishes a solid foundation for the company as we transition toward completing our investments and executing our growth strategy for 2024 and the future. I'll now turn the call over to Neal for more details on our 2023 results.
Performance in the fourth quarter and full year 2023 establishes a solid foundation for the company as we transition towards completing our investments in executing our growth strategy for 'twenty 'twenty four and the future.
I'll now turn the call over to Neil for more details on our 2023 results Neil.
Neal E. West: Thank you, Keith. Good morning, everyone. I'll begin on slide nine with an overview of shipments and conversion revenues. While the demand environment for the full year of 2023 was mixed, conversion revenue for the year was a record $1.47 billion, an increase of $83 million or 6% compared to 2022, while total shipments were down 58 million pounds or 5%. I will begin by looking at each of our end markets in detail. Aerospace and high-strength product demand remains very strong, and by year-end, our conversion revenue surpassed the peak levels we experienced in 2019 prior to the pandemic, which is well ahead of our initial expectations. We delivered fourth quarter and full year conversion revenue ahead of our outlook as we benefited from a more favorable product mix than anticipated.
Thank you Keith and good morning, everyone I'll begin on slide nine with an overview of shipments and conversion revenue.
Well the demand environment for the full year of 2023 was mix conversion revenue for the year was a record $1.47 billion, an increase of $83 million or 6% compared to 2022, well total shipments were down 58 million pounds or 5%.
Looking at each of our end markets in detail.
Aerospace and high strength product demand remained very strong and by year end, our conversion revenue surpassed the peak levels, we experienced in 2019 prior to the pandemic, which is well ahead of our initial expectations.
We delivered fourth quarter and full year conversion revenue ahead of our outlook as we benefited from benefited from a more favorable product mix than anticipated.
Neal E. West: Our unique ability to flex our capacity in our Trentwood facility as general engineering demand remains soft further contributed to our performance. For the full year 2023, Arrow high-strength conversion revenues totaled $533 million, up $177 million, or 50%, reflecting higher pricing on a 36% increase in shipments over last year, and packaging and destocking activity with our beverage customers stabilized during the fourth quarter. However, as we noted in our third quarter call, we experienced destocking of our coded food products in the fourth quarter, which makes up a considerable amount of our shipment. For the full year of 2023, packaging conversion revenue was $503 million, down 9% year-over-year.
Our unique ability to flex our capacity in our facility is general engineering demand remained soft further contributed to our performance.
For the full year 2023, Aero high strength conversion revenue totaled $533 million up $177 million or 50%, reflecting higher pricing and a 36% increase in shipments over last year.
And packaging destocking activity with the with our beverage customers stabilized during the fourth quarter. However.
However, as we noted in our third quarter call, we experienced destocking in our coated food products in the fourth quarter, which makes up a considerable amount of our shipments.
For the full year of 2023 packaging conversion revenue was $503 million down 9% year over year shipments during the year were down 7% or 43 million pounds over 2022 which as a reminder was impacted by write magnesium related declaration of force for sure.
Neal E. West: Shipments during the year were down 7% or 43 million pounds over 2022, which, as a reminder, was impacted by our magnesium-related declaration of force majeure. In addition to shipments being impacted by destocking in the market, primarily by beverage-related products in the first half of the year, followed by cold and food products in the fourth quarter, conversion revenue was impacted by a less favorable product mix, which negatively affected our results, and General Engineering. Additionally, reduced demand for plate products along with increased availability of imports persisted through Q4. We expect pricing to remain under pressure for these products until semiconductor demand returns. In regard to our GE long products, we saw destocking beginning to stabilize in the fourth quarter, following five quarters of steady destocking. General engineering conversion revenue for 2023 was $305 billion, down 17% year-over-year due to a 29% reduction in shipment as a result of destocking, primarily for plate products, on higher pricing to address inflationary costs. And finally, automotive demand remained relatively stable as supply chain issues continued to offset fairly good demand.
In addition to shipments being impacted by Destocking in the market primarily by beverage related products in the first half of the year followed by the cold at food products in the fourth quarter conversion revenue was impacted by a less favorable product mix, which negatively affected our results.
In general engineering reduced demand for plate products, along with increased availability of imports persists through Q4.
We expected pricing to remain under pressure for these products until semi conductor demand returns.
In regard to Archie long products, we saw destocking beginning to stabilize in the fourth quarter following five quarters of steady destocking.
General Engineering conversion revenue for 2023 was $305 billion down 17% year over year due to a 29% reduction in shipment as a result of destocking, primarily for plate products on higher pricing to address inflationary pressures inflationary cost.
And finally automotive demand remained relatively stable and supply chain issues continued to offset fairly good demand for the full year 2023 auto conversion revenue was $116 million up 21% over 2022 and an 8% increase in shipments due primarily to higher pricing to offset inflationary costs.
Neal E. West: For the full year 2023, auto conversion revenue was $116 million, up 21% over 2022, and an 8% increase in shipments due primarily to higher pricing to offset inflationary costs. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to slide 10, reported operating income for 2023 was $96 million. After adjusting for corporate restructuring costs of approximately $5 million, adjusted operating income was $101 million, up $66 million from 2022. Our effective tax rate for the full year of 2023 was 16%, compared to 22% in 2022, primarily due to an R&D credit created during the year. Cash taxes for the full year of 2023 were approximately $2 million.
Additional details on conversion revenue on shipments by end market applications can be found in the appendix of this presentation.
Now moving to slide 10.
Reported operating income for 2023 was $96 million after adjusting for corporate restructuring cost of approximately $5 million adjusted operating income was $101 million up $66 million from 'twenty to 'twenty two.
Our effective tax rate for the full year 2023 was 16% compared to 22% in 2022, primarily due to an R&D credit created during the year.
Cash taxes for the full year 2023 was approximately $2 million for the full year 'twenty 'twenty four we expect our effective tax rate before discrete items to continue to be in the low to mid 20% range under current tax regulations, we anticipate that our 'twenty 'twenty four cash taxes or foreign and state taxes to continue.
Neal E. West: For the full year 2024, we expect our effective tax rate before discrete items to continue to be in the low to mid 20% range under current tax regulations. We anticipate that our 2024 cash taxes, or foreign and state taxes, will continue to be in a two to three million dollar range with no U.S. federal cash taxes until we consume our federal NOLs, which as of year-end 2023 were 101 million dollars. Reported net income for 2023 was $47 million, or an income of $2.92 per diluted share compared to a net loss of approximately $30 million, or a loss of $1.86 per diluted share in 2022. After adjusting for a net total of approximately $4 million of pre-tax non-run rate gain, including the previously mentioned restructuring charge, adjusted net income for 2023 was $44 million, or an income of $2.74 per adjusted Now turning to slide 11.
To be in a $2 million to $3 million range with no U S. Federal cash taxes until we consume our federal Nols, which as of year end 2023 were $101 million.
Reported net income for 2023 was $47 million.
Or an income of $2.92 per diluted share compared to a net loss of approximately $30 million or a loss of $1 86 per diluted share in 2022.
After adjusting for a net total of approximately $4 million of pre tax non run rate gains, including the previously mentioned restructuring charge. Adjusted net income for 2023 was $44 million or an income of $2.74 per adjusted diluted share compared to an adjusted net loss of approximately.
$9 million or a loss of 55 cents per adjusted diluted share in 2022.
Now turning to slide 11.
Adjusted EBITDA for 2023 was $210 million up approximately $68 million from 'twenty to 'twenty two.
Neal E. West: Adjusted EBITDA for 2023 was $210 million, up approximately $68 million from 2022. Adjusted EBITDA as a percentage of conversion revenue improved by approximately 400 basis points from 2022 to 14.3%. The improvement in adjusted EBITDA was primarily the result of higher pricing that captured a higher cost of alloys and other inflationary costs with a higher mix of aerospace product shipments. In addition, we continue to stabilize operations following the significant supply chain issues we experienced at our Warwick Rolling Mill over the last two years and remain focused on cost reductions and operational efficiencies across our platform, including corporate and plant overhead-related costs, to address the impact of inflationary costs Partially offsetting these actions throughout the year, as noted earlier, was destocking and packaging and general engineering, along with continuing inflationary costs, which we believe are beginning to subside.
That EBITDA as a percentage of conversion revenue improved by approximately 400 basis points from 'twenty to 'twenty two to 14, 3%.
The improvement in adjusted EBITDA was primarily the result of higher pricing to capture the higher cost of alloys and other inflationary costs with a higher mix of aerospace product shipments in.
In addition, we continue to stabilize operations following the significant supply chain issues, we experienced at our work Rolling mill over the last two years and remain focus on cost reductions and operational efficiencies across our platform, including corporate overhead related costs to address the impact of inflationary cost.
Partially offsetting these actions throughout the year as noted earlier was destocking in packaging in general engineering, along with continuing inflationary cost, which we believe are beginning to subside.
Now turning to a discussion of our balance sheet and cash flow.
We generated approximately $69 million of positive free cash flow for the full year 2023, primarily due to lower capital expenditures than anticipated and improved anticipated inventory management.
At the end of December 2023, total cash of approximately $82 million and approximately $517 million of net borrowing availability on our revolving credit facility provided total liquidity of nearly $600 million.
Neal E. West: Now turning to a discussion of our balance sheet and cash flow, we generated approximately $69 million of positive free cash flow for the full year 2023, primarily due to lower capital expenditures than anticipated and improved anticipated inventory management. At the end of December 2023, total cash of approximately $82 million and approximately $570 million of net borrowing availability in our revolving credit facility provided total liquidity of nearly $600 million. There were no borrowings under the revolving credit facility during and as of the quarter ending December 31st, and it remains undrawn.
There were no borrowings under our revolving credit facility dairy and as of quarter end December 31st and it remains undrawn 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.
As of December 20th 23, our net debt leverage ratio improved over 200 basis points to 4.6 from seven times at year end 2020 to moving towards our targeted leverage ratio of two to two and a half times.
Neal E. West: Our total equity 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. As of December 2023, our net debt leverage ratio improved by over 200 basis points to 4.6 from 7 times a year in 2022, moving towards our targeted leverage ratio of 2 to 2.5 times. Turning to capital allocation, our strategy remains focused on supporting the growth of our business while concurrently returning value to our stockholders in the form of quarterly cash dividends. Our full-year capital expenditures came in below forecast at $143 million, which was predominantly driven by the timing of bill payments related to our growth capital project.
Turning to capital allocation, our strategy remains focused on supporting the growth of our business, while concurrently returning value to our stockholders in the form of quarterly cash dividends, our full year capital expenditures came in below forecast at $143 million, which was predominantly driven by the timing of submission for.
Bill payments related to our growth capital projects, we now project for the full year 'twenty 'twenty four that our capital expenditures will be in the range of $170 million to $190 million, which reflects the carryover from 'twenty to 'twenty three due to timing our raw coal project remains on schedule with the majority of.
The remaining $110 million you'd be spent in 2024.
The balance of capital expenditures will be for ongoing sustainability and additional growth projects, which Keith will cover shortly.
Additionally, we returned approximately $50 million in 2023 towards shareholders through dividend payments, making it our 17th consecutive <unk> consecutive year of dividend payments to our shareholders.
Neal E. West: We now project for the full year 2024 that our capital expenditures will be in the range of $170 million to $190 million, which reflects the carryover from 2023 due to timing. Our Rogue Coal project remains on schedule with the majority of the remaining $110 million to be spent in 2024. The balance of capital expenditures will be for ongoing sustainability and additional growth projects, which Keith will cover shortly. Additionally, we returned approximately $50 million in 2023 to our shareholders through dividend payments, making it our 17th consecutive year of dividend payments to our shareholders. On January 11th, we announced that our board of directors declared a quarterly dividend of 77 cents per common share, which underscores the continuing confidence our board and management team have in our longer-term strategy to improve our profitability and increase stockholder value. And now, I'll turn the call back over to Keith to discuss our 2024 and beyond outlook. Thanks, Neal.
January 11th we announced that our board of directors declared a quarterly dividend of 77 cents per common share, which underscores the continuing confidence our board and management team have in our longer term strategy to improve our profitability increase stockholder value.
And now I'll turn the call back over to Keith to discuss our 'twenty 'twenty four and beyond outlook Keith.
Thanks Neil.
Now I'll turn to our outlook for the fiscal year of 2024.
Beginning with aerospace on slide 13.
The strong momentum we've been experiencing in Aero and high strength shipments is expected to carry over into 2024 and beyond supported by improved declarations by our customers for large commercial jets and strong demand for our products projected for defense and space business jet and other industrial.
Real high strength applications.
It's become increasingly evident that as demand for our products grows our customers expect us to invest for additional capacity to meet their needs. Therefore, we are moving forward with the initial investment and our previously announced phase seven expansion at our <unk> Rolling Mill.
Keith Harvey: Now I'll turn to our outlook for the fiscal year of 2024, beginning with aerospace on slide 13. The strong momentum we've been experiencing in aero and high strength shipments is expected to carry over into 2024 and beyond, supported by improved declarations by our customers for large commercial jets and strong demand for our products projected for defense, space, business jet, and other industrial high strength applications.
When initially proposed in early 2020, the total cost of the phase seven investment was estimated to be approximately $225 million over several years within the expected 20% to 25% increase in total capacity.
However, the phase seven launch was delayed due to the pandemic.
And the time since then our team has been able to further evaluate and provide options to deliver the initial incremental increase of capacity with more modest investments.
Keith Harvey: It has become increasingly evident that as demand for our products grows, our customers expect us to invest in additional capacity to meet their needs. Therefore, we are moving forward with the initial investment in our previously announced Phase 7 expansion at Trentwood Rolling. When initially proposed in early 2020, the total cost of the Phase 7 investment was estimated to be approximately $225 million over several years, with an expected 20% to 25% increase in total capacity. However, the Phase 7 launch was delayed due to the pandemic.
Currently we expect initial investments of approximately $25 million to yield an additional 5% to 6% increase of overall capacity for aerospace and general engineering products, which will be the first of multiple investments planned over the next several years at shrimp.
Okay.
The culmination of which is expected to deliver the earlier announced increasing capacity.
We expect capital outlays for this initial investment will be approximately $10 million. This year with the balance supplied in the first half of 2025.
The increased capacity is expected to be available to our customers beginning in the second half of 2025.
Our team will continue to evaluate efficient lower cost options to deliver the full capacity expected from the phase <unk> expansion to meet the needs of our customers and deliver value to our shareholders.
Keith Harvey: In the time since then, our team has been able to further evaluate and provide options to deliver the initial incremental increase of capacity with a more modest investment. Currently, we expect initial investments of approximately $25 million to yield an additional 5% to 6% increase in overall capacity for aerospace and general engineering products. This will be the first of multiple investments planned over the next several years at Trent, the culmination of which is expected to deliver the earlier announced increase in capacity. We expect capital outlays for this initial investment to be approximately $10 million this year, with the balance applied in the first half of 2025.
2020 for Aero and high strength shipments and conversion revenues are expected to improve approximately 1% to 2% versus 2023 as we now expect improving general engineering demand in the second half of the year, which utilize as much of the same capacity.
As some aerospace products.
Turning now to packaging on slide 14.
As discussed previously we began experiencing destocking from our food packaging customers in the second half of 2023.
We felt that destocking in these products would not be as prolonged as we experienced on the beverage side of our business in late 2022 and through most of 2023.
Keith Harvey: The increased capacity is expected to be available to our customers beginning in the second half of 2025. Our team will continue to evaluate efficient, lower cost options to deliver the full capacity expected from the Phase 7 expansion to meet the needs of our customers and deliver value to our shareholders. 2024 Arrow and High Strength Shipments and Conversion revenues are expected to improve approximately 1 to 2 percent versus 2023, as we now expect improving general engineering demand in the second half of the year, which utilizes much of the same capacity as some aerospace products. Turning now to packaging on slide 14.
Based on discussions with our customers. We now expect Destocking for these products to moderate and some time during the first quarter of this year.
Our customers have indicated expected sales growth in 2024 in the mid single digits above 2023 levels.
As a result, we now expect our packaging shipments and conversion revenue to improve by approximately 5% to 7% in 2024 year over year.
We have a number of exciting and impactful initiatives underway at our Warren facility in 2024.
Our new role coder.
Installation is progressing well and is on time for completion by the end of the year with production expected to commence in 2025.
Keith Harvey: As discussed previously, we began experiencing destocking from our food packaging customers in the second half of 2023. However, we felt that destocking in these products would not be as prolonged as we experienced on the beverage side of our business in late 2022 and through most of 2023. Based on discussions with our customers, we now expect destocking for these products to moderate and end sometime during the first quarter of this year.
As we previously stated this is a high value project expected to convert approximately 25% of our existing capacity to higher value added coated products.
Fully implemented this project is expected to have a 300 to 400 basis points impact on overall margins.
To date, we have a large portion of this capacity already committed with discussions underway for the balance.
Keith Harvey: Our customers have indicated expected sales growth in 2024 in the mid-single digits above 2023 levels. As a result, we now expect our packaging shipments and conversion revenue to improve by approximately 5 to 7% in 2024 year over year. We have a number of exciting and impactful initiatives underway at our Warwick facility in 2024. Our new roll coder installation is progressing well and is on time for completion by the end of the year, with production expected to commence in 2025.
Upon exiting our hot metal supply agreement with the adjacent alcoa's smelter at year end 2023.
We have successfully implemented a new metal input strategy at the rolling mill utilizing a significantly higher mix.
Used beverage cans and recycled scrap in our mix, which will greatly improve our greenhouse gas footprint.
What's the strategy is fully implemented this year, we estimate the run rate impact of this revised strategy will deliver a consolidated margin improvement by 150 to 200 basis points on a full year basis.
Keith Harvey: As we previously stated, this is a high-value project expected to convert approximately 25% of our existing capacity to higher-value-added, coded products. Fully implemented, this project is expected to have a 300 to 400 basis points impact on the overall market. To date, we have a large portion of this capacity already committed, with discussions underway for the balance. Upon exiting our hot metal supply agreement with the adjacent Alcoa smelter at year-end 2023, we have successfully implemented a new metal input strategy at the rolling mill, utilizing a significantly higher mix of used beverage cans and recycled scrap in our mix, which will greatly improve our greenhouse gas footprint.
We remain excited about the potential for our packaging business.
With strong secular growth expected in the 3% to 5% range, coupled with our longstanding customer relationships with multi year contracts and a focus on higher margin value added coated products. We're confident in the positive outlook for this business longer term.
Now turning to general engineering on Slide 15.
Distributors continue to reduce inventories for both plate and long products through the fourth quarter of 2023.
However, we are experiencing an increase in order rates for all general engineered products since the start of 2024 and believe Destocking could and early this year.
Keith Harvey: Once this strategy is fully implemented this year, we estimate the run rate impact of this revised strategy will deliver a consolidated margin improvement of 150 to 200 basis points on a full year basis. We remain excited about the potential for our packaging business, with strong secular growth expected in the 3% to 5% range, coupled with our longstanding customer relationships with multi-year contracts and a focus on higher margin, value-added coded products. We're confident in the positive outlook for this business in the longer term. Now turning to general engineering on slide 15. Distributors will continue to reduce inventories for both plate and long products through the fourth quarter of 2023.
We now feel the fourth quarter of 2023 was the trough for demand and we expect improving shipments and conversion revenue as we progress into 2024.
More specifically as semiconductor plate demand gains momentum in the second half of 2024 and into 2025, we expect capacity from our initial phase seven investment will support additional growth in these markets and provide the catalyst for <unk>.
Future planned investments at our truckload operations.
As a result, we expect shipments in 2024 to improve by approximately 5% to 6% with resulting conversion revenue to be flat to up 1% compared with 2023 as we expect modest pressure on prices earlier in the year as demand improves.
Keith Harvey: However, we are experiencing an increase in order rates for all General Engineer products since the start of 2024 and believe the stocking could end early this year. We now feel the fourth quarter of 2023 was the trough for demand, and we expect improving shipments and conversion revenue as we progress into 2024. More specifically, as semiconductor plate demand gains momentum in the second half of 2024 and into 2025, we expect capacity from our initial phase seven investment will support additional growth in these markets and provide the catalyst for future planned investments at our Trentwood operation. As a result, we expect shipments in 2024 to improve by approximately five to six percent, with resulting conversion revenue to be flat to up one percent compared with 2023, as we expect modest pressure on prices earlier in the Longer term, we are maintaining a positive outlook for our general engineering business on the whole, given the reshoring of certain manufacturing industries back to North America. Next, I'll turn to the automotive industry on slide 16.
Longer term, we are maintaining a positive outlook for our general engineering business on the whole given the re shoring of certain manufacturing industries back to North America.
Next I'll turn to automotive on slide 16.
Higher build rates for trucks and light vehicles in North America have driven a steady recovery in the automotive market throughout 2023, which we expect will carryover into 2024.
As a result.
Expect our 2020 for auto shipments and conversion revenue to increase 3% to 5% from 2023 levels.
Turning to slide 17.
I'll now turn to our summary outlook for the full year 2024.
We expect demand will continue to improve across all of our key markets.
As a result, we expect conversion revenue improved 2% to 3% with expected EBITDA margins, improving by 70 to 170 basis points year over year.
Manufacturing efficiencies are also expected to improve as demand recovers and our operations continue to stabilize.
Keith Harvey: Higher build rates for trucks and light vehicles in North America have driven a steady recovery in the automotive market throughout 2023, which we expect will carry over into 2024. As a result, we expect our 2024 auto shipments and conversion revenue to increase three to 5% from the 2023 level. Turning to slide 17.
These efficiencies are expected to help partially offset expected higher labor and medical costs.
In summary, despite all of its challenges 2023 turned out to be a strategically important year for Kaiser as we laid the groundwork necessary to capture the numerous opportunities ahead of us.
The combination of our strong market position as a key supplier and diverse end markets with multi year contracts and with key strategic partners strong liquidity position and a flexible nature of our cost structure.
Keith Harvey: I'll now turn to our summary outlook for the full year 2024. We expect demand to continue to improve across all of our key markets. As a result, we expect conversion revenue to improve by 2-3%, with expected EBITDA margins improving by 70-170 basis points year over year. Manufacturing efficiencies are also expected to improve as demand recovers, and our operations continue to stabilize. These efficiencies are expected to help partially offset expected higher labor and medical costs.
Positions us well for long term sustainable growth.
With that I will now open the call to any questions you may have operator.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys. One moment. Please we poll for questions.
Operator: In summary, despite all of its challenges, 2023 turned out to be a strategically important year for Kaiser as we laid the groundwork necessary to capture the numerous opportunities ahead of us. The combination of our strong market position as a key supplier in diverse end markets, with multi-year contracts and with key strategic partners, strong liquidity position, and a flexible nature of our cost structure positions us well for long-term sustainable growth. With that, I will now open the call to any questions you may have, operator. Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone. A confirmation tone will indicate that your line is in the question. You may press star 2 if you would like to remove your question.
Our first question comes from Josh Sullivan with the Benchmark Company. Please proceed with your question.
Hey, good morning.
Good morning, Josh Josh.
Just wanted to get a feel for what has been the market response for aerospace plate just sent PSA production cap for the 737 was put in place.
Well you know they are.
I think Boeing had planned on moving up from its current 38 right Josh.
So they're going to be staying at that 38 rate until the FAA and Boeing are agree that they've met the quality requirements to enable them to move and from a Kaiser perspective, yes, Boeing is an important and a large customer with us but.
Josh Sullivan: For participants using speaker equipment, it may be necessary to pick up your handset before pressing the start. One moment, please, while we poll for questions. Our first question comes from Josh Sullivan with The Benchmark Company. Please proceed with your question. Take care. Thank you. Take care. Good morning, Tav.
It gets back to the beauty and we've talked about this for years the diversity of our business. So we have talked for a long time about being a big part of business jet a big part of defense.
Keith Harvey: I just wanted to get a feel for, you know, what has been the market response for aerospace plate since the FAA production caps for the 737? Well, you know, they, I think Boeing had planned on moving up from its current 38 rate, Josh. And so they're going to be staying at that 38 rate until the FAA and Boeing agree that they've met the quality requirements to enable them to move. And from a Kaiser perspective, yes, Boeing's an important and a large customer with us. But it gets back to beauty.
A big part of other programs that are going out there and other large commercial airframe.
So we're seeing strength perhaps.
Perhaps capped in one area.
We have got opportunities in other areas that are continue to draw on our capacity.
And when you look at the culmination of what we see in the in the markets overall and coupled with the fact of what we expect.
Keith Harvey: And we've talked about this for years, the diversity of our business. So we have talked for a long time about being a big part of business jets, a big part of defense, a big part of other programs that are going out there, and other large commercial airframes. So we're seeing strength perhaps capped in one area.
In talking with customers on the general engineering side of our business it really drove us to two.
<unk>.
We announced the launch of phase seven at Tremblant, and we had been watching this closely but then with the strength that we saw last year are they.
Keith Harvey: We have got opportunities in other areas that are continuing to draw on our capacity. And when you look at the culmination of what we see in the markets overall and coupled with the fact that we expect in talking with customers on the general engineering side of our business, it really drove us to announce the launch of Phase 7 at Trentwood. And we had been watching this closely, but then with the strength that we saw last year, the recovery that came back to levels, at least on conversion revenue, it really drove us to look at this expansion to take care of these markets. And I would say that, you know, I said it in my comments, but I really think the Trentwood team has been extremely innovative over the years. You know, we've done six of these expansions.
The recovery that came back to the levels at least on conversion revenue.
It really drove us to look at this expansion to take care of these markets and I would say that.
Said it in my comments, but it was really the Trent wood team has been extremely innovative over the year you know we've done six of these expansions.
They've done them each one of those were done while we were basically red lined at current capacity levels.
And they have continued to work and develop on more efficient lower cost ways to add capacity.
And so that really encouraged us with all the market demand drivers I spoke to.
To begin the launch of phase seven so overall, we still see a really strong brawl.
Keith Harvey: They've done them, each one of those was done while we were basically redlined at current capacity levels, and they have continued to work on and develop more efficient, lower cost ways to add capacity. And so that really encouraged us, with all the market demand drivers I spoke to, to begin the launch of Phase 7. So overall, we still see a really strong draw overall for the entire market. And then maybe, what data points specifically are you seeing that give you confidence, you know, on the food packaging side, that that cycle is indeed recovering here or is looking to recover? Well, it's not a huge, broad category of customers that can do that.
Overall for the entire markets.
Got it got it.
And then maybe.
What data points, specifically are you seeing that give you confidence on the food packaging side.
Michael is indeed recovering here looking to recover.
Well it's.
It's not a huge broad.
Category of customers that can handle that and then of course, where we're at.
A large player there. So we have good discussions with our customer base on a regular basis. So we've been in discussions with them since the fourth quarter of last year about how things look and then I think it's also being reinforced.
Keith Harvey: And, of course, we're a large player there, so we have good discussions with our customer base on a regular basis. So we've been in discussions with them since the fourth quarter of last year about how things look, and then I think it's also being reinforced. A number of those have already had their earnings calls, and they've mentioned growth reoccurring here in 2024 and back to that mid single-digit growth over the entire year of last year. So I think when you couple that together, we feel pretty good.
A number of those have already had their earnings call and they've mentioned about.
Growth in reoccurring here in 2024 and back to that mid single digit growth over the entire year of last year. So I think when you couple that together, we feel pretty good we're seeing the order rates begin to perk back up and.
And think that they will only strengthen as we get into the typical strong demand quarters of the second and third quarter for that business.
Keith Harvey: We're seeing the order rates begin to perk back up, and we think that they will only strengthen as we get into the typical strong demand quarters of the second and third quarters for that business. So we feel that the stocking should be behind us after the early part of the year. Great, thank you for the time. Thank you, Josh.
So we feel that that destocking will it should be behind us after the early part of the year here.
Speaker Change: Great. Thank you for the time.
Speaker Change: Thank you Josh.
Speaker Change: Our next question comes from Bill Peterson with Jpmorgan. Please proceed with your question.
Keith Harvey: Our next question comes from Bill Peterson with J.P. Morgan. Please proceed with your question. Hi, good morning.
Bill Peterson: Hi, good morning, and thanks for taking taking the question on the on the EBITDA sort of guide 70 basis points.
Bill Peterson: On the EBITDA sort of guide, there are 70 basis points on it. How should we think about the cadence? You talked about some of the drivers. How should we think about the cadence?
Bill Peterson: 170 basis point improvement how should we think about the cadence you talked about some of the drivers and some of the puts and takes but how should we think about the cadence for some of these improvements as you move through the year should this be more back half weighted or is there some seasonality associated with us any sort of color there would be helpful.
Neal E. West: and others. Should we be more back and forth on this, or is it just an issue? Sure. Well, we're still starting out the first part of the year with some of the destocking built on, especially on the packaging and on the general engineering products. We do expect those to improve as we go through the year. So I would say probably the first quarter will be our most challenging quarter from a demand perspective.
Speaker Change: Sure well.
We're still starting out the first part of the year and some of the Destocking Bill.
Speaker Change: Bill on the especially on the packaging and on the General Engineering products, we do expect those to improve as we go through the year. So I would say probably the first quarter will be our most challenging year from a demand perspective.
Neal E. West: Okay, and then as we move forward in the year, we're also projecting some increases in our efficiencies through the operation. So obviously, as demand settles down and actually starts to recover, our operations have stabilized. We worked a lot on cost and will continue to work on cost as we go forward.
Speaker Change: Okay, and then as we as we move forward in the year. We're also projecting some increases in our efficiencies through the operations. So obviously as demand settles down and actually starts to recover our operations have stabilized we worked a lot on cost.
Speaker Change: Continue to work on cost as we go forward. So so we should expect with demand to increase the businesses to stabilize and we see some improvement as we get to the latter part of the year Youll start to see a momentum pick up from quarter to quarter from the second quarter through the balance of the year.
Neal E. West: So we should expect, with demand increasing, businesses to stabilize, and we see some improvement as we get to the latter part of the year. You'll start to see momentum pick up from quarter to quarter, from the second quarter through the balance of the year. That is our outlook for right now. Okay, thanks for that. I'm not sure if this is this year or not, but on this packaging raw materials strategy. Thank you for joining us. Thank you, and Raw Materials, this 150 to 200 basis point improvement on consolidated margins, I guess. Can you provide us with code here on this strategy, including the timing?
Speaker Change: Here is our outlook right now.
Speaker Change: Okay. Thanks for that I'm not sure if this Hudson.
Speaker Change: And this year or not but on this packaging raw materials strategy, where you discuss the raw material sourcing.
Speaker Change: This 150 to 200 basis point improvement on consolidated margins I guess.
Speaker Change: Can you provide us some color here on this strategy, including the timing of some of them hit this year or is this really more beyond this year.
Neal E. West: Did some of this hit this year, or is this really more beyond that? No, no. We'll start out a good bit this year. We're ramping up the first part of the year, Bill, but this has been a strategy that we've been looking to deploy for really the last two to three years. We did not feel long-term that a supply position with using prime metal from a coal-fired power facility was going to really meet the requirements for our greenhouse gas emissions and the requirements that our customers were putting on us for the use of more recycled content in their products, and so this is something we've been working towards. Our agreement was officially up with Alcoa at the end of the year, and so in the latter part of last year, we had been As you imagine, it could make a little difference than working just across the aisle from a smelter, but the team there has done an excellent job, and we've proven that we can move away from a big part of prime and move to secondary.
Speaker Change: No no.
Speaker Change: We'll start out a good bit this year, we're ramping up the first part of the year Bill but this this has been a strategy that that we've been looking to deploy really for the last two to three years.
Speaker Change: We did not feel long term that.
Speaker Change: Our supply position from with using prime metal from coal fired power facility was was going to really meet the requirements for our greenhouse gas and the requirements that our customers. We're putting on is for the use of more recycled content in their products.
Speaker Change: And so this is something we've been working to towards our agreement was officially up with I'll call. It the end of the year and so in the latter part of last year, we had been executing using more secondary more scrap from other sources.
Speaker Change: And we have really worked to perfect that and worked that well within our process as you imagine it could be a little different than working just across the all from a smelter, but the team there has done an excellent job and we've proven that we can move away.
Speaker Change: From a big part from Prime and move to secondary there are obviously cost advantages associated with that which gives us comfort in giving a little bit of that guidance out there on what the impact of this is going to be so quite frankly, we just fully expect this to keep ramping up.
Neal E. West: There are obviously cost advantages associated with that, which gives us comfort in giving a little bit of that guidance out there about what the impact of this is going to be. So quite frankly, we just fully expect this to keep ramping up, and we're pretty encouraged by the results that we've seen so far. So as we get more efficient in this process, I think we'll be able to cement those kind of margin improvements with that metal strategy. All right, thanks for that.
Speaker Change: And we're pretty encouraged by the results that we've seen so far so as we get more efficient in this process.
Speaker Change: I think we will be able to submit those kind of margin improvements with that metal strategy.
Alright, thanks for that maybe just picking to piggyback on that last point.
Neal E. West: Maybe just piggybacking on the last point, I guess if you think about the broader scrap market in the U.S., especially over a longer period, especially considering with two rolling mills ramping up and your additional capacity as well, how do you see the supply situation, given that, ultimately, there's going to be a lot stronger demand? Yeah, no, I think that's going to be a strategic input from any producer, and we've certainly been spending a lot of time on it, developing relationships with suppliers and ensuring that we have the right amount of availability from either prime resources globally and or, you know, secondary and scrap resources here in North America. So I think it's going to be a critical part of Kaiser's taking that extremely important part of our strategy going forward. So this is really a culmination of the last couple of years.
Speaker Change: I guess, if you think about the broader scrap market in the U S, especially over a longer period, especially considering with two rolling mills.
Speaker Change: We're ramping in your additional capacity as well how do you see the supply situation given that ultimately there's going to be a lot stronger demand.
Speaker Change: Describe the Carol.
Carol: Yeah, No I think thats going to be a strategic input from any producer and we've certainly been spending a lot of time on developing relationships with suppliers and ensuring that we have the right amount of availability for either prime resources global.
Speaker Change: <unk> and Dor.
Speaker Change: Secondary and scrap resources here in North America. So I think it's going to be a critical part kaiser's taking that extremely important.
Speaker Change: Part of our strategy going forward. So this is the a really.
Speaker Change: Culmination of the last couple of years, what are we going to do especially with <unk>.
Neal E. West: What are we going to do, especially with work, but we've also really been developing that strategy for all of our businesses. So from the extrusion side, which we've historically used a large amount of scrap, and those relationships that we have more on a regional basis there, they're really sound. And we've been executing there for a number of years.
Speaker Change: With work and but we've also really been developing that strategy for all of our businesses.
Speaker Change: So.
From the extrusion side, which we've historically used large amount of scrap and there was those those relationships that we have more on a regional basis, there, they're really sound and we've been executing there for a number of years, so, but but I think it's a critical part of the go forward strategy now.
Neal E. West: But I think it's a critical part of the go-forward strategy. Now, we expect more scrap availability, but those relationships and the availability of that will be a key strategic component of anybody's game plan. Okay, I think I'll pass.
Speaker Change: We expect more scrap availability, but those relationships and the availability of that will be a key strategic component of antibodies game plan.
Speaker Change: Okay. Thanks, I'll pass on.
Neal E. West: Thank you, Bill. Our next question comes from Timna Tanners with Wolf Research. Please proceed with your question. Yeah, hey, good morning, guys.
Speaker Change: Thank you Bill.
Our next question comes from Timna Tanners with Wolfe Research. Please proceed with your question.
Timna Beth Tanners: Yeah, Hey, good morning, guys.
Speaker Change: Yeah.
Timna Beth Tanners: Hello, I wanted to dive a little bit more into some of the end market discussion in particular on the auto side was just kind of interested in the sizable increase off of a really strong year. We just kind of how does that jive with some of the concern over inventory already getting rebuilt and maybe EDI demand following a bit I guess is there something perhaps about.
Timna Beth Tanners: I wanted to dive a little bit more into some of the end market discussion, in particular on the auto side. I was just kind of interested in the sizable increase off of a really strong year. Just kind of how does that jive with some of the concern over inventory already getting rebuilt and maybe EV demand falling a bit, like is there something perhaps about aluminum taking share or some other opportunity that we might see? Well, you know, we've been following that as well, Timna, and it seems like, especially over the last few months, a slowdown on the demand for EVs for a multitude of reasons. Perhaps transitioning is always bumpy, but the good thing about our business is that we've been very focused, especially on the ICE side of the business, on light trucks and SUVs. And as business has somewhat slowed on the EVs, the business around the trucks and SUVs has been fairly robust. And we've been associated with those programs for a good while.
Aluminum taking share or some other opportunity that we might be missing.
Timna Beth Tanners: Well.
Speaker Change: We've been following that as well Tim then it seems like especially over the last few months.
Speaker Change: A slowdown on the demand for Evs.
Speaker Change: For multitude of reasons, perhaps transitioning is as always bumpy, but but the good thing about our business is is that we've been very focused on especially on the ice side of the business on light truck and Suvs and as the business has.
Speaker Change: Somewhat slowed on the evs that the business around the trucks and Suvs have been fairly yes.
Speaker Change: Fairly robust.
Speaker Change: And we've been associated with those programs for a good while we also have parts.
Keith Harvey: We also have parts that we've been supplying forever, for instance, like ABS brake systems. We're a large supplier of that side of the business. Of course, whether it's an EV or an ICE vehicle, all of those require the use of ABS brake systems and so forth.
Speaker Change: That we've been supplying forever for instance, like ABS brakes systems.
Speaker Change: We are large supplier into that side of the business of course, whether it's in the EV or an ice vehicle all of those require the use of ABS brakes systems, and so forth. So I feel pretty good about our ability to probably whether this transition.
Keith Harvey: So I feel pretty good about our ability to probably weather this transition. But we're always a little cautious. A lot of changes that have taken place there, you know, as the strike sort of, the UAW strike that sort of, blends out and figures out where things are going to be. I like our position.
Speaker Change: But it's always we're a little we're a little cautious lot of changes that have taken place. There you know that as the strike sorta the UAW strike that sorted.
Speaker Change: Blends out and figures out where things are going to be.
Speaker Change: I like our position as you know, it's probably only about eight or 9% of our total conversion revenue, so perhaps not as impactful to us as perhaps others.
Keith Harvey: As you know, it's probably only about 8% or 9% of our total conversion revenue, so perhaps not as impactful to us as it is to others. But I like where our contracts are. And, of course, we'll weather the transition with the rest of the market. Okay, fair, that's helpful. I wanted to also ask you a little bit more about Phase 7, because I know in the past you talked about kind of putting that on hold for the time being, and now it sounds like you've got a strategy that enables you to stretch that out, but can you talk a little bit more about, you know, it seems like most people are predominantly finding cost overruns, and in fact, in this case, it sounds like you're able to So can you elaborate more on how that's going to work and how to think about the timing of that cadence?
Speaker Change: But.
Speaker Change: Unlike where our contracts are and of course, we will just whether the transition with the rest of the market.
Speaker Change: Okay Fair. That's helpful. Lance you also ask a little bit more about phase seven and on the past you had talked about kind of putting that on hold for the time being and now it sounds like you've got a strategy that enables you to stretch that out can you talk a little bit more about it seems like predominantly people are finding cost overruns and in fact in this case it sounds like Youre able.
Speaker Change: Do the expansion maybe with less investment. So can you elaborate more on how that's going to work and how to think about the timing of that cadence.
Keith Harvey: Yeah, what we really like, Timna, is, you know, large projects, and I think, as you've seen, from a number of folks in our space and in the steel space and so forth, we weren't the only ones that were subject to a lot of inflationary costs, material high costs, and so forth. So those are always a challenge in these types of environments. What really, really excited us and really got us to the point of launching Phase 7 is that this is more in alignment with how we did the previous six expansions. These are more bite-size type investments that we can make so they have a lower impact on the operating business. We're still very mindful of the fact that we're gonna move as quickly as possible, and I think you saw some pretty good headway we made on our leverage numbers. And so we're really mindful of maintaining that, maintaining our dividend, maintaining our, but also committing to growth for our customers here. And that really put us over the top there.
Yeah.
Lance: What we really like Timna is large projects and I think as you've seen.
Lance: From a number of folks in our space and in the steel space and so forth.
Lance: We werent the only one that was subject to a lot of inflationary cost material high cost and so forth. So those are always a challenge in these types of environments, what really really excited us and really got us to the point of launching the phase seven is that this is more in alignment with how.
Lance: We did the the previous six expansions these.
Lance: These are more bite sized type investments that we can make.
Lance: So there have a lower impact on the on the operating business.
Lance: We're still very mindful of the fact that we're going to move as quickly as possible and I think you saw some pretty good headway, we made on our on our leverage.
Lance: Number and so we're really mindful of maintaining that maintaining our dividend maintaining our but also committing to the growth for our customers here and that really put us on the over the top there we're to the point and you saw how the demand was for air.
Keith Harvey: We're to the point, and you saw how the demand was for Arrow for us in the fourth quarter. It's really come back as fast or faster than we would have expected. So one might say we might be a little behind the time on launching this, but I think we're, I like the cadence of being able to do these in smaller buckets, more manageable size, and then get those increments of capacity into the business within a one-year period, as opposed to these large projects that typically take multiple years to deliver any kind of return on the investment. And of course, these investments that we're making at So those are always pretty exciting for us to be able to launch and take advantage of. Okay, helpful.
Lance: So for us in the fourth quarter, it's really come back as fast or faster than we would've expected. So.
Lance: One might say, we might be a little behind the time on launching this.
Lance: But but I think where I.
Lance: I like the cadence of being able to do these and smaller buckets more managing size and then get those those increments of capacity into the business within a one year type period.
Lance: As opposed to these large projects that typically take multi year to deliver any kind of a return on the investment so and of course these investments that we're making a Trump would these are all in those.
Lance: Those historically high mid 'twenty to high 20% margin type products. So those always are pretty exciting for us to be able to launch in and take advantage of.
Speaker Change: Okay helpful last one for me with just would be curious to get your thoughts on the impact of vertical things outside of your company specific so starting with novellus.
Keith Harvey: So the last one for me was just, I would be curious to get your thoughts on the impact of a couple things outside of your company specifics. So starting with Novellis, you know, over budget and extending the timeframe of their startup, any potential 10% tariff if President Trump is reelected, and any potential additional tariff on Russian aluminum. So it would be great to get any high-level thoughts on those possible outcomes or at least the latter. Sure. Well, look, with regard to Novellas. Look, we understand. It was really tough to come back.
Speaker Change: Above budget and extending the timeframe of their startup.
Speaker Change: Any potential 10% tariff if president Trump is reelected and any potential additional tariff on Russia in aluminum.
Speaker Change: It does do it would be great to get any high level thoughts on those possible outcomes or at least that.
Speaker Change: Later too.
Speaker Change: Sure.
Speaker Change: Look with regard to novellus.
Speaker Change: Look we understand.
Keith Harvey: And if you look at the percentage increase that's gone up and the delay that they had, we were perhaps suffering through the same thing. The percent increase, even though it's got a couple more zeros approaching it for them, was about the same that we had with our large project, the roll code at Warwick. So, a little bit of an expectation that Misery loves companies, so we were all seeing the same things. But, you know, they're a great company. They'll get through it.
Speaker Change: It was really tough to come back and if you look at the percentage increase has gone up in <unk>.
Speaker Change: And the delays that they had.
Speaker Change: Yes.
We were we were.
Speaker Change: Perhaps suffering through the same thing the percent increase even though it's got a couple of more zeroes approach to it for them was about the same that we had with our large project. The role Code award so a little bit of a of an expectation.
Speaker Change: That that misery loves company. So we were all seeing the same things.
Speaker Change: So, but they are a great company they will get through that.
Keith Harvey: They're very knowledgeable about packaging and cars, so they'll get that out over time. I suspect you'll see that in all large projects that have been launched. We certainly haven't been insulated, nor has anyone else been, from the inflationary costs that have affected us.
Speaker Change: We're very knowledgeable in the packaging and the automotive so they'll they'll get that that out over time.
Speaker Change: I suspect you will see that in all of the large projects that have been launched.
Speaker Change: We certainly haven't been insulated nor is anyone else there from the inflationary costs that are impacted.
Keith Harvey: But we continue to see the reasoning for expansion because growth is occurring, and we either have to keep up with our customers, or we're going to be left behind. So, the focus is there. Moving over to tariffs, well, look, with regard to tariffs on Russian materials, we made a commitment as a company when the Ukrainian war started out that we weren't going to, you know, work with any types of companies and or materials from Russia. So, that really wouldn't impact us. I know, perhaps the LME will see what impact that would have, but Kaiser buys metal from a lot of sources, and I'm confident and actually pleased with the fact that we don't use Russian material.
Speaker Change: But we continue to see the reasonings for expansion because growth is occurring and we either have to keep up with our customers or we're going to be.
Speaker Change: We're going to be left behind so.
Speaker Change: The focus there moving over to tariffs.
Speaker Change: Look with regard to tariffs on Russian material.
Speaker Change: We made a commitment as a company.
Speaker Change: When Theyre Ukrainian war started out that we werent going to.
Speaker Change: Two.
Speaker Change: Work with any types of companies and door materials from Russia, So that really wouldn't impact us I know, perhaps the LMA, we will see what impact that would have but the kaiser buys metal from a lot of sources and and I'm confident and actually pleased with the <unk>.
Speaker Change: Fact that we don't use Russian material and.
Keith Harvey: And then with regard to tariffs that might take place, you're all, hey, you know, Timna, we've come to learn to react to many things in this industry, and Kaiser will continue to do that. We'll react; we'll do the right things for our company, for our country, and, obviously, for our shareholders. We're going to, we're well diverse in a lot of areas, and I don't see how tariffs are going to take off from the demand for our products because there is a lot of focus here in North America, but they may provide an opportunity, a catalyst for us, actually an incentive, but we're pretty well positioned to weather those things. As you know, tariffs have been in place with Chinese companies for years, and multiple products come and go, and we just have learned to operate in a very different environment.
Speaker Change: And then with regard to tariffs that might take place.
Speaker Change: Timna, we've come to learn to react too many things in this industry and Kaiser will continue to do that we'll react we'll do the right things.
Speaker Change: For our company for our country and.
Speaker Change: And then obviously for our shareholders, we're going to work.
Speaker Change: We're well diverse and a lot of areas and.
Speaker Change: Uh huh.
Speaker Change: Don't see how tariffs going to take off from the demand of our products because a lot of focus here in North America, but may provide an opportunity or catalyst for us actually an incentive but.
Speaker Change: We're pretty well positioned to weather those things as you know tariffs have been in place with Chinese companies for years.
Speaker Change: And multiple products and come and go in and we just have learned to operate in a very.
Neal E. West: I mean to add to that too, Timna, is that we put in the contained metal pass-through at the beginning of 2023 to ensure that any of the impacts on alloys and aluminum, those things are now pass-through cloth, and they contain metal. So as those tariffs come through, we've now got those mechanisms in place to make sure that this rolls through our pricing mechanism. Okay, great. Thanks again.
Speaker Change: Different environment.
Speaker Change: I mean to add to that too Timna as you remember we put in the contained metal pass through at the beginning of 2023 to ensure that any of the impacts of alloys and aluminum those things are now a pass through cost and it contained metal so as those tariffs come through we've now got those mechanisms in place to make sure that this rolls through our pricing.
Speaker Change: Mechanisms.
Speaker Change: Okay, great. Thanks again.
Timna Beth Tanners: Thank you. My next question comes from Kurt Woodworth with UBS; please proceed with your question. Yeah, thanks. Good morning.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Curt Woodworth with UBS. Please proceed with your question.
Curt Woodworth: Yeah. Thanks, good morning.
Kurt Woodworth: I guess, I'm trying to think of it. What about the trajectory of, I guess, packaging EBITDA? So, you know, you have the roll code line at 300 to 400 basis points. You talked about the raw material kind of scrap integration, giving you another 150 to 200. And then, obviously, you probably have more operating leverage coming through the system later this year and next year. Is there a way to... Maybe quantify what you think the EBITDA uplift could be from those things? This is my first experience.
Curt Woodworth: Hey, guys good.
Curt Woodworth: Good luck.
Curt Woodworth: But the trajectory.
Curt Woodworth: I guess packaging EBIT.
So you have the wool coat line of three to 400 basis points, you're talking about the raw material scrap integration, giving you. Another 150 to 200 and then.
Curt Woodworth: Obviously, you probably have more operating leverage coming through the system. Later this year and next year is there a way to.
Curt Woodworth: Maybe quantify what you think the EBITDA.
Curt Woodworth: Uplift could be from those things.
Curt Woodworth: <unk>.
Speaker Change: This is my first question yes.
Keith Harvey: Yeah, well, what we've tried to do, Kurt, and we've listened to a lot of you about, you know, an understanding we have been talking about how this portfolio of businesses, we believe we could, moved back to Kaiser's historic mid-20s type margin and above. And we haven't made it easy for people to understand that with the challenges we've had over the last couple of years. So, you know, there's been a lot of volatility that we've dealt with. And as you know, from our segmentation perspective, Kaiser doesn't break out EBITDA for those various businesses. But what we wanted to do was to try to give a bridge from where we are or have been to where we think we're driving the business so that people can understand a little bit more of what we intend to do and how that's going to affect us and get us back up to those levels.
Speaker Change: Well, what we've tried to do Kurt and we listen to a lot of you about.
Speaker Change: Understanding we have been talking about how this portfolio of businesses, we believe we could.
Speaker Change: Back to Kaiser's historic mid Twenty's type margin and above and.
Speaker Change: We haven't made it easy for people to understand that with the challenges we've had over the last couple of years. So.
Speaker Change: So theres been a lot of volatility that we've dealt with and and as you know we don't from a segmentation perspective, Kaiser doesn't break out EBITDA for those various businesses.
Speaker Change: But what we wanted to do was to try to give a bridge from where we are have been to where we think we're driving the business. So that people can understand a little bit more what we intend to do and how thats going to impact and get us back up to those levels.
Keith Harvey: So, for instance, if you look at the call-out that you mentioned in the packaging, especially the metal strategy and the roll coat, and really, that's not adding capacity; that's adding roll coat coated capacity so that we can move our existing capacity to a higher margin, which is one of the traits that Kaiser does in all of our business. So, you begin to start seeing how we can bridge from, you know, where we ended up at 14, 14.3. For last year, so you can start seeing how the progression, when we bring these capacities, these innovations online, when we get efficiencies, we'll start giving a little bit more clarity into what those efficiency gains, what those investment gains will be to help you on your models as you try to see how we're going to get from here to there. Is there a way to quantify the EBITDA improvement from these two initiatives?
Speaker Change: So for instance, if you look at the Callout that you mentioned on on the packaging, especially with the metal strategy and the and the Roku and really that's that's not adding adding capacity, adding roll coat coated capacity. So that we can move our existing.
Speaker Change: Past due to a higher margin.
Speaker Change: Which is one of the traits that Kaiser does in all of our businesses.
Speaker Change: So you begin to start seeing how we can bridge from where we ended up at 14 14 three for last year. So you can start seeing how the progressive when we bring these capacities. These innovations online when we get efficiencies will start giving a little bit.
Speaker Change: More clarity into what those efficiency gains.
Speaker Change: Those investment gains will be to help you on your models as you try to see how we're going to get from here to there.
Speaker Change: Okay.
Speaker Change: Is there a way to.
Speaker Change: Quantify the EBITDA improvement from those two initiatives.
Neal E. West: you announced or give us a sense for, maybe what you believe the EBITDA upside is. Well, when we gave that outlook, that's the impact on the overall business with those investments. So that's not relegated to just the packaging. That's the overall consolidated, uh, reference there. Perhaps that wasn't as clear. So So the... If you sum the high end of those two pieces, it's 600 basis points of margin uplift across the consolidated value-added revenue of the business. You've got it. That's the way we laid it out for you. All right. That's very helpful.
Speaker Change: Or give us a sense for.
Speaker Change: Maybe what you believe the EBITDA upside is.
Speaker Change: Well, we when we gave those.
Speaker Change: That outlook.
Speaker Change: That's the impact on the overall business.
Speaker Change: With those investments.
Speaker Change: So it's not that's not really relegated to just the packaging that's the overall consolidated.
Speaker Change: Business the.
Speaker Change: For reference there, perhaps that wasn't as clear.
Speaker Change: So.
Speaker Change: The.
If you sum the high end of the two pieces at 600 basis points of margin uplift across the consolidated value added revenue of the business.
Speaker Change: Yes, you've got it that's that's the way we laid it out for you.
Speaker Change: Alright.
Speaker Change: That's very helpful.
Keith Harvey: And then I guess with respect to Aerospace, you know, looking at conversion revenue up one to two percent. Yeah, I assume there's still some inflationary pressures in the business. You highlighted labor, medical, maybe you're getting some relief from energy, but then there's productivity. But would you expect your Aero high-strength business? Can you get EBITDA growth? off a 1% conversion revenue increase this year. Yeah, yeah, we can. And because, let me tell you one of the reasons that the arrow is going to wouldn't perhaps be as high as the increment that we had last year. It's back to my comment about general engineering, beginning to recover in the second half. And so we've got a commitment to our service center customers, some large OEMs.
Speaker Change: And then I guess with respect to <unk>.
Speaker Change: Aerospace.
Speaker Change: Looking conversion revenue up 1% to 2%.
Speaker Change: Yet I assume theres still some inflationary pressures in the business you highlighted labor medical maybe youre getting some relief on energy but.
Speaker Change: And then there is productivity, but would you expect your Aero high strength business.
Speaker Change: EBITDA growth.
Speaker Change: A 1% revenue conversion revenue increase this year.
Speaker Change: Yes, yes, we can.
Speaker Change: Because let me tell you one of the reasons that the arrow is going to.
Wouldn't perhaps be as high as what we.
Speaker Change: Increment that we had last year.
Speaker Change: It's back to my comment about general engineering, beginning to recover in the second half and so we've got a commitment to our service center customers some large Oems.
Speaker Change: And other markets that that we're not going to cut them out.
Speaker Change: Just for because aerospace is returning.
If you can recall.
Speaker Change: We had that.
Speaker Change: Conflict in 2019.
Speaker Change: And and so we made a commitment to those customers that we were going to not only service the growth for arrow, but we're going to be in a position to service their needs on general engineering.
Speaker Change: That's a reflection of moving part of that capacity to general engineering, most likely in the second half. The other component. There. Kurt is is that as you recall a lot of the aerospace is contractual business.
Speaker Change: So there is not going to be a lot of change on the pricing.
Speaker Change: For a good portion of that business those contracts are generally multi year that are in place. So.
Speaker Change: Any additional capacity we've had in the past we've applied to spot business, which has been pretty pretty pretty good for us as well.
Speaker Change: Business in general engineering for spot business as is equal to the returns that we can get an error almost so we're we're we're going to make sure that we cover all parties, but it's back to the reason that we just we've launched phase.
Speaker Change: We to the point, we need more capacity and.
Speaker Change: And we like the way, we're going to lay it in over multi years smaller increments and it allows us to make sure that we grow with our customers.
Speaker Change: Okay and then.
Speaker Change: How should we think about Capex for 25, I know you talked about the majority of the <unk> and will be finished this year, but then you may have a little bit incremental in <unk>.
Speaker Change: Kevin are there any other.
Kevin: Moving pieces were carryover.
Speaker Change: <unk> to think about.
Speaker Change: Yes.
Kevin: Not at this point and not at those levels.
Kevin: So.
Kevin: We have our.
Kevin: Sustaining capex, we talked about roughly $60 million $60 million roughly.
Kevin: We will have smaller we should have the role coat line completed the majority of that spending behind us and so other than sustaining and some smaller growth potentials like like I can envision for the second phase seven or something of that nature.
Kevin: Magnitude.
Kevin: We expect that the spending will.
Kevin: Dramatically reduce in.
Kevin: In the out years.
Kevin: Starting in 'twenty five.
Speaker Change: Okay, Alright makes sense. Thank you.
Thank you.
Speaker Change: Our next question comes from Josh Sullivan with the Benchmark Company. Please proceed with your question.
Speaker Change: Hey.
Josh Sullivan: If you get an overlapping GE semiconductors cycle and in aerospace cycle.
Josh Sullivan: Commitment you just referenced to the <unk> market is still going to be a spot based market or I guess, how much of the current expansion that you're talking about this year is speculative versus contracted.
Speaker Change: Well a change that's taken place Josh for generally general engineering has historically been spot market.
Speaker Change: But for a lot of the large Oems that are that are.
Speaker Change: Going to be requiring some of our product.
Speaker Change: They're interested in multi year contractual agreements and that's a little bit because what they've experienced is what happened in the aerospace a number of years back.
Speaker Change: Their growth can.
Speaker Change: Can be limited by the availability of existing capacity.
Speaker Change: And so as they look more strategically of securing their business and their growth.
Speaker Change: They're more interested in entering into multiyear agreements and of course, we.
Speaker Change: We are going to take care of our service centers customers, but some of these large Oems with re shoring thats, taking place provide really great opportunities for us.
Speaker Change: They love, our Kaiser select products and their preferred and.
Speaker Change: Again, great growth opportunity for us and again, a reinforcement for phase <unk>.
Speaker Change: Got it.
Speaker Change: Maybe just what do lead times look like at the service to distribute centers for Aero high strength right now.
Speaker Change: Well it varies by by supplier I can tell you that.
Speaker Change: Kaiser is and has been on allocation.
Speaker Change: Four.
Speaker Change: A long time and we're currently on allocated to.
Speaker Change: Customers and another reason for phase seven.
Speaker Change: Launch.
Speaker Change: Got it thank you for your time.
Speaker Change: Thank you.
Speaker Change: There are no further questions at this time I would now like to turn the floor back over to Keith Harvey for closing comments.
Keith Harvey: Okay. Thank you Maria.
Keith Harvey: And thanks for everyone for being with US today I look forward to updating you on our first quarter 2024 results in April Thank you.
Keith Harvey: Okay.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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