Q3 2024 Kaiser Aluminum Corp Earnings Call
Greetings and welcome to the Kaiser Aluminum Corporation third quarter 'twenty 'twenty four earnings conference call.
Speaker Change: At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation should anyone 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>.
Speaker Change: Investor Relations. Thank you you may begin.
Kim Orlando: Thank you good morning, everyone and welcome to Kaiser Aluminum's third quarter 2024 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 dotcom.
Kim Orlando: 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.
Kim Orlando: Before we begin I'd like to refer you to the first four slides of our presence.
Kim Orlando: It reminds you that the statements made by management and information contained in this presentation that constitute forward looking statements are based on management's current expectations.
Kim Orlando: 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.
Kim Orlando: The company undertakes no duty to update any forward looking statements to conform the statement to actual results or changes in the company's expectation.
Kim Orlando: In addition, we have included non-GAAP financial information in our discussion.
Kim Orlando: Reconciliations to the most comparable GAAP financial measures are included in the earnings release, and then in your appendix of the presentation.
Kim Orlando: 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.
Kim Orlando: And you've referenced to EBITA and our discussion today means adjusted EBITDA, which excludes non run rate items for which we have provided reconciliations in the appendix.
Kim Orlando: Further slide five contains definitions of terms and measures that will be commonly used throughout today's presentation.
Kim Orlando: At the conclusion of the company's presentation, we will open the call for questions.
Speaker Change: I would now like to turn the call over to Keith Harvey eat.
Keith Harvey: Thanks, Kim and thank you all for joining us for a review of our third quarter 2024 results.
Keith Harvey: Turning to slide seven.
Our business performed largely in line with our expectations in the third quarter as we continued to execute against our strategy to drive long term sustainable growth and margin expansion for the company.
Keith Harvey: We generated approximately $50 million of EBITDA in the quarter, which includes an approximate $4 million GAAP LIFO expense, which Neil will discuss in a few moments.
Keith Harvey: As we move into our fourth quarter, we are on track to meet our conversion revenue outlook for the year as well as our outlook for year over year margin expansion.
Keith Harvey: The long term outlook for the markets. We serve remains robust the products. We provide are industry, leading and we are continuing our disciplined approach in investing capital to meet the needs of our customers and to deliver profitable growth and margin expansion to our shareholders.
Keith Harvey: We believe we have laid the foundation for continued strong progress towards these goals next year and for many years to come.
Speaker Change: I'll now turn the floor over to Neal to discuss the quarter in more detail and then I'll be back to discuss our outlook.
Neal West: Thank you Keith and good morning, everyone I'll begin on slide nine with an overview of our shipments and conversion revenue.
Neal West: Conversion revenue for the third quarter was $362 million, an increase of $5 million or 1% compared to the prior year period.
Neal West: Looking at each of our end markets and detail Aero and high strength conversion revenue totaled $128 million in the third quarter, 2024% to 5% decline on a 7% decrease in shipments over the prior year quarter, primarily reflecting broader supply chain challenges in the market.
Neal West: Packaging conversion revenue was $128 million, an increase of 9% year over year and improved mix and pricing.
Neal West: While shipments declined 2% as we work to stabilize our production levels. Following the second quarter outage and Destocking period earlier this year underlying demand remained strong as reflected in our results.
Neal West: General Engineering products conversion revenue was $76 million, a 1% increase year over year, and a 5% increase in shipments pricing remained relatively stable despite uneven demand and import pressures.
Neal West: And finally automotive conversion revenue was $29 million up 3% compared to the third quarter 2023, and a 2% decline in shipments due primarily to higher pricing and improved product mix.
Neal West: Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation.
Neal West: Now moving to slide 10.
Reported operating income for the third quarter of 2024 was $17 million, which includes a $2 million increase in depreciation and amortization expense over the third quarter of 2023.
Neal West: After adjusting for non run rate charges of approximately $4 million related to an increase in legacy environmental reserves at our Newark facility. Our adjusted operating income was relatively stable year over year at $21 million.
Neal West: Our effective tax rate continues to be in the low to mid 20% range under current tax regulations, we anticipate that our 'twenty 'twenty for cash taxes for foreign and state taxes will be in a $4 million to $5 million range with no U S. Federal cash tax until we consume our federal Nols, which at the year end of 2023 were 100.
Neal West: $1 million.
Neal West: Reported net income in the third quarter, 2024 was $12 million or <unk> 74 cents per diluted share compared to net income of $5 million or 34 cents per diluted share in the prior year quarter.
Neal West: After adjusting for approximately $4 million of non run rate charges previously mentioned and approximately $9 million of non operating income related to legacy land sales and settlements of prior year insurance, claiming claims adjusted net income for the third quarter 2024 was $8 million or <unk>.
Neal West: 51 cents per diluted share compared to adjusted net income of $7 million or <unk> 46 cents.
Neal West: Per diluted share in the prior year quarter.
Neal West: Now turning to slide 11.
Neal West: Adjusted EBITDA for the quarter was $50 million up approximately $2 million or 4% from the prior year period.
Neal West: EBITDA margin for the quarter was 13, 9% up from 13, 3% in the prior year period.
Neal West: Increase in adjusted EBITDA, and EBITDA margin was driven primarily by higher conversion revenue, partially offset by an increase in energy costs and a higher GAAP LIFO charge.
Speaker Change: As noted by Keith net income and adjusted EBITDA for the third quarter were negatively impacted by GAAP LIFO charge of approximately $4 million.
Speaker Change: This quarter's LIFO charge was primarily attributed to a value to valuing our quarter and higher inventory pounds on hand at the lower metal and inventory costs, we had at the beginning of the quarter.
Speaker Change: Our higher inventory levels were primarily driven by the strong customer demand we've experienced for our packaging products.
Speaker Change: As it is difficult to forecast changes in future market driven metal costs, along with changes in the mix of our ending inventory we provide our outlook for adjusted EBITDA based on projected sell through unit cost without the impact of GAAP LIFO accounting.
Speaker Change: We will continue to call out the gap LIFO accounting adjustments when we present, our actual quarterly performance.
Speaker Change: Now turning to a discussion of our balance sheet and cash flow.
Speaker Change: On September 30th 2024, total cash of approximately $46 million and approximately $549 million of borrowing availability in our revolving credit facility provided total liquidity of approximately $595 million.
Speaker Change: There were no borrowings under our revolving credit facility daring and as of quarter end and it remains undrawn.
Speaker Change: As of September 30th 'twenty 'twenty four our net debt leverage ratio was four six times against our target leverage ratio of two to two and a half times.
Speaker Change: Turning to capital allocation.
Speaker Change: Capital expenditures for the third quarter totaled $51 million primarily.
Speaker Change: Attributed to continuing investment in our fourth clothing line project at our work facility.
Speaker Change: Our full year 2024 capital expenditures are now forecasted to be in a range of $180 million to $190 million.
Speaker Change: Elevated capital expenditures this year, primarily reflect the work we have been doing at our work facility.
Speaker Change: We expect our future annual capital expenditures to be significantly lower and more in line with our prior year's historical averages.
Speaker Change: Finally on October 15th we announced that our board of directors declared a quarterly dividend of 77 per common share, reflecting the confidence our board and management team have in our strategy and improve our profitability reduce our net debt leverage ratio and increase stockholder value.
And now I will turn the call back over to Keith to discuss our outlook Keith.
Keith Harvey: Thanks, Neal now I'll turn to our outlook.
Keith Harvey: Beginning with aerospace on slide 13.
Keith Harvey: We remain on track to meet the outlook I provided last quarter for aerospace and high strength shipments and conversion revenue.
Keith Harvey: The market drivers for commercial aircraft production remained very healthy as Oems hold years of aircraft backlog passenger traffic stays very strong and planes remain full.
Keith Harvey: As we plan for 2025, we expect aircraft production rates to build momentum throughout the year and complement our steady offerings in defense <unk> space business, Jeff and other industrial applications product categories, all of which remain very healthy.
I expect our aerospace and high strength and markets will remain strong for Kaiser for years to come.
Keith Harvey: We are closely monitoring the negotiation and outcome between Boeing and the machine issue.
Keith Harvey: The timing of this resolution may have a short term impact on demand and ship.
Keith Harvey: Now turning to packaging on slide 14.
Keith Harvey: I'd like to highlight the performance at our Warrick facility on top of the strong demand in the packaging end market. Following a period of Destocking, which ended earlier this year.
Keith Harvey: Our shipment levels rose for the fourth consecutive quarter and the momentum continues into the fourth quarter of this year.
Keith Harvey: The momentum in packaging comes at an ideal time as we near the completion of our fourth coding line, which will shift approximately 25% of our mix to higher margin coated products, while also improving our throughput.
Our coating line remains a key component to our long term strategy within this growth market.
Keith Harvey: Initial commissioning has already begun and we expect output from this new line to be a strong contributor to our performance next year as we ramp up to full production in early 2025.
Keith Harvey: At full run rate. This project is expected to provide approximately 300 to 400 basis points of margin expansion to our consolidated businesses margins.
Our efforts to optimize Warwick have progressed over the last few years and we look forward to sharing how this strategic investment will contribute to our 2025 EBITDA expectations and beyond as we meet with you again for our fourth quarter call in February of next year.
Keith Harvey: Now turning to general engineering on Slide 15.
Keith Harvey: We believe Destocking has run its course within our long products and currently we believe shipments are matching true end market demand.
Keith Harvey: To give you a look at one of the key metrics, we use to determine the underlying health of this end market service center inventory levels for long products are now at levels not seen since 2013.
Keith Harvey: Low inventory conditions warrant our attention as they have historically bolstered orders as our customers generally rebuild inventory positions in the first half of any given year.
Keith Harvey: For plate, while inventories remain elevated in the channel. We're seeing initial signs of order recovery from our semiconductor customers as they prepare for an improving equipment cycle in 2025.
Keith Harvey: While low service center inventory levels for long products and the outlook for semiconductor plate into 2020 five create an environment for improved demand continued.
Keith Harvey: Continued pricing stability will need the support of an improvement in North American manufacturing.
Keith Harvey: Historically extended periods of Destocking and contracting manufacturing purchasing manager indices have generally had an adverse impact on price.
Keith Harvey: However, we are encouraged that pricing has held up better than expected, thus far due to the strength of our product lines market position and the positive impacts of re sure.
Speaker Change: Next I'll turn to automotive on slide 16.
Speaker Change: I'd like to highlight that our shipment levels are up modestly from 2023, and we remain on track to meet the conversion revenue target previously communicated on an improved mix of higher value added products.
Speaker Change: Even as the automotive production rates have adjusted lower throughout the year.
Speaker Change: The SUV and heavy and light truck platforms, where we participate have continued to outperform the broader automotive market.
Speaker Change: Turning to slide 17.
Speaker Change: I'll now turn to our summary outlook for the full year 2024, which is consistent with the one I shared last quarter.
We continue to expect overall conversion revenue to remain stable between zero and 1% growth as compared with 2023.
Speaker Change: And our result in EBITDA margin is estimated to be up 50 to 100 basis points year over year, not including the impact from GAAP LIFO accounting.
Please note that this outlook does not reflect additional delays in shipments of declared orders due to current labor or supply chain challenges within the aerospace end markets.
Speaker Change: In summary, I am.
Speaker Change: I'm pleased with our efforts this year to stabilize the business and make significant advancements in our work packaging facility.
Speaker Change: I am confident Kaiser is well positioned ahead of 2025, which we expect will be a transformational year for the company as we capitalize on key investments and several markets we serve.
Speaker Change: As always we will remain highly diligent on our cost and focus on improving operating efficiencies.
Speaker Change: I look forward to sharing our 2025 outlook with you in February.
Speaker Change: With that I will now open the call to any questions you may have.
Speaker Change: Operator.
Speaker Change: 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.
Speaker Change: For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.
Speaker Change: One moment please poll for questions.
Speaker Change: Yeah.
Speaker Change: The first question is from Timna Tanners from Wolfe Research. Please go ahead.
Timna Tanners: Yeah, Hey, good morning, I wanted to probe the <unk>.
Speaker Change: Aerospace aside a bit more and we are hearing from some other suppliers to the sector that there is some destocking happening. Some of this is just other suppliers slower too yeah, sorry to proceed and and also just a destocking because of the lower build rates across Boeing and Airbus.
Speaker Change: So I guess first question is are you seeing that and I know you said that your forecast doesn't reflect any delayed orders some challenges in the aero end markets, but with the Boeing strike not looking like its getting resolved near term can you give us a little bit more color about what to expect of that proceeds. Thanks.
Speaker Change: Hey, good morning Timna.
Speaker Change: Yes listen.
Speaker Change: Reflect back in our second quarter earnings call, we put out a little notice that we felt that the the inventory in the channel was higher and that it could impact our shipments and our <unk>.
Speaker Change: Conversion revenue associated with that and we were we moved it down our outlook is to be down 2% to 3% on both shipments and revenue conversion revenue as compared to the record year of 2023, and so with our comments today, we've reiterated that we still believe.
Speaker Change: We've we're within that envelope off through the balance of the year now some color around that.
Speaker Change: Again, it is at least as it reflects the Kaiser.
We've talked a lot about the diversity of our products and our markets in aerospace and high strength.
Speaker Change: So that's a reflection back on defence and space all of which we saw enhanced business through the quarter.
Speaker Change: Now as it relates to the Oems, obviously, we're not in control of that situation there is inventory.
Speaker Change: As you would expect and that's in that supply line because there are certain build rates that all of the large OEM air framers have been buying too and they've all reflected that their build rates art to those levels.
Speaker Change: But with some color specifically for us.
Speaker Change: I'm very pleased with the types and quality of the contracts we've negotiated.
Speaker Change: Over the years, so we built in some in.
Speaker Change: <unk> levels.
Speaker Change: To help us through those times I can tell you that on declarations for all of the large OEM air Framers, we have shipped the bulk of the declarations already through this year. So I'm really thinking you know, obviously I can't predict what's going to happen.
Speaker Change: With others, but I think our exposure to a prolonged outage or delay in build rates is is minimal.
Speaker Change: Compared to what our declarations were stated for the year.
Speaker Change: Okay. That's helpful. I think thank you I wanted to switch gears, if I could to talk about that potential as a potential impact of further tariffs. So given the election coming up and that being topical can you remind us kind of about how you think about further tariffs on imports.
Speaker Change: Aluminum downstream products, which I think haven't been targeted as much in the past and how that could impact your business. Thanks, yeah.
Speaker Change: We look where the majority of the businesses that we participate I would say with other than.
Speaker Change: On the aerospace side and on semiconductor were mainly focused on North America for our customers and aren't they outlets for our products. So quite frankly additional tariffs I believe will help strength anything that helps strengthen the north American manufacturing is going to be a big.
Speaker Change: Positive for us.
Speaker Change: I think you've seen some momentum move on those tariffs, we've seen Canada and Mexico imposed a 25%.
Speaker Change: Tariffs are levels as opposed to the existing what they were maybe 10% earlier. So I think that momentum is building, Tim and I believe ultimately stronger North American manufacturing.
Speaker Change: And how we're positioned there that will do nothing but strengthen this company.
Speaker Change: So I believe we're moving in a positive momentum forward in the area and the question you just asked.
Timna Tanners: Okay. Thank you.
Speaker Change: Thank you.
Speaker Change: The next question is from Bill Peterson from Jpmorgan. Please go ahead.
Bill Peterson: Yeah, good morning, and thanks for taking the questions and also thanks for posting that presentation in advance.
Bill Peterson: Wanted to ask a few on packaging and actually a few of the other end markets too if I may.
Bill Peterson: The first one on packaging it looks like the shipments didn't improve as much as it was.
Bill Peterson: Russia is expected in the third quarter, but with the full year guidance of plus 2% to 3%.
Bill Peterson: Looks like a significant step up sequentially I guess were there any impacts to call out in <unk> and I guess, how should we think about shipments and <unk>.
Bill Peterson: And maybe even just saying like further can we get back or exceed the 170 plus range. We saw in the second half of 2021 run rate.
Speaker Change: Yeah, Hey, good morning Bill.
Speaker Change: Yes, good questions.
Speaker Change: This quarter you might recall as we went into the second quarter. We said that we had a backlog of orders and so quite frankly from our delivery performance pain that we've call. Some of our customers we've been in catch up mode and so while we've been trying to catch up and make sure.
Speaker Change: We do.
Speaker Change: Don't don't provide any disruption to our customers, we really been moving in a way to make sure that everyone gets resolved here everyone gets settled some so some of the efficiency may not have been as large as we had hoped.
Speaker Change: However that backlog is beginning to fall and we're beginning to continue to hit the strong demand and were ramping up on a monthly basis with the output of the facility. So we have a very strong fourth quarter outlook in front of us and our customers are already.
Speaker Change: Talking about increased levels for 2025.
Speaker Change: I am very excited about deploying.
Speaker Change: The new investment we've been putting up there because.
Speaker Change: Frankly that mix is going to shift for us as we move into 2025, a lot of that mix is going to be able to be done in house on a very efficient line to complement the other three lines that we have.
Speaker Change: So.
Speaker Change: Our output should only improve as we move into 2025.
Speaker Change: And as we really implement the new investment we've got there at the facility so at.
Speaker Change: Right now we're running every shift we can and we believe we will become more efficient and and we're going to have a better mix of products as we run through.
Speaker Change: Really fourth quarter and really getting into 2025.
Speaker Change: Great maybe sticking on that last point on the new railcar line is there has there been any further progress in customer commitments what are the expectations I guess more granular on the timing of the qualification and ramp is this a few one or two quarters into the into the new year or more likely towards the.
Speaker Change: Later in the later in the year.
Bill Peterson: Yes. So we're we continue to negotiate with customers Bill.
Speaker Change: Some of the contracts that we're discussing we're really due to be up in 2026. So we're actually pulling forward some of that discussion.
Speaker Change: To ensure that we can get the mix that the customers are requesting from us. So some of that's underway we've talked about in the past, we've got probably about 70% of that capacity already contracted for and the 30% remaining is is under discussion as we speak and <unk>.
Speaker Change: So as we look at ramp right here so.
Speaker Change: So we're.
Speaker Change: For my comments, we're already hot commissioning certain aspects of that line I was up there a couple of weeks ago and.
Speaker Change: Progress has been very well and really looking for a startup of the line in the fourth quarter here and we'll begin qualifications with customer.
Speaker Change: Customer product and testing for that so we'll debug and qualify beginning in early 2025.
Speaker Change: My expectations are is that hopefully we'll reach full ramp rate will begin to AR.
Speaker Change: Get to that level as we enter into the end of the first quarter or perhaps the beginning of the second quarter of next year.
Speaker Change: Thanks for that color, maybe pivoting a bit to metal sourcing strategy I guess can you discuss project, thus far how much margin benefit maybe has been realized and maybe are you seeing any impacts from tighter scrap spreads and if so when would you expect those might reserve might revert.
Speaker Change: Yeah. So the strategy moving forward, we've been implementing as we as we discussed in our second quarter call.
Speaker Change: We've got to position set up very well.
Speaker Change: But I will reiterate that the scrap spreads versus prime levels are very much compressed at the moment and so the gain that you might expect to see from an historic or at least over the last four or five years is pretty compressed to that level at the moment now.
Speaker Change: When will that compression and when when spreads get better.
Speaker Change: I don't have the answer for that Bill all I know is that we're preparing all of our businesses to utilize more scrap okay more recycled content.
Speaker Change: And we'll be in a position to take advantage of whatever compression generally there is at least there is some gain to be using the recycled and whatever is out there we intend to maximize it.
Bill Peterson: Great and if I could sneak one more then they can take them offline.
Speaker Change: Pivoting the automotive obviously theres a lot of evidence of further weakness, which obviously more so from European makers, although some domestic.
Speaker Change: I guess first of all can you speak to how this is impacting your business and then the types of platforms that <unk> lever too and what youre doing to help mitigate any sort of negative trends.
Speaker Change: Yeah, Bill I think there's a lot of this gets down to what platforms you participate on what products you provide.
We've been in the automotive industry for about 50 years Theres a lot of products that we won't provide we just don't see a competitive position for Kaiser. However, those that we do and thats the extruded product side.
Speaker Change: We're really on platforms and applications.
Speaker Change: Really.
Speaker Change: That benefit us so we're agnostic to whether it's a.
Speaker Change: EV or an IC E or even hybrids.
Speaker Change: In some applications. So all of those utilize the components that we provide.
Speaker Change: And that's been going very well for us as I mentioned on the comments.
We're heavily focused on light heavy truck and Suvs.
Speaker Change: Fortunately for us that's holding up very well I think you see the results from general Motors and others. They really focus back on that that category of the marketplace being continued to be very strong and supported by consumer sentiment. So are.
Speaker Change: We're on the right vehicles, we're on North America, where we're not in Europe. So we're very focused where we are and with our products and as you saw in the results there even though the overall shipments are down in that in that area of automotive our business is up and.
Speaker Change: I think we're continuing to see some strengthening of that going into 2025. So I am very pleased with our exposure. There is you know its probably our smallest.
Speaker Change: Position from our conversion revenue perspective, but we like where we are participating.
Speaker Change: Yes, it makes sense, thanks for taking all the questions and good luck.
Speaker Change: Here on the on all the projects you have.
Speaker Change: Thanks Bill.
Speaker Change: This concludes the question and answer session I would like to turn the floor back over to Keith Harvey CEO for closing comments.
Keith Harvey: Yes. Thank you.
Keith Harvey: Thanks for being with US today I look forward to updating you on our fourth quarter and full year 2024 results in February have a good day.
Speaker Change: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Speaker Change: Okay.
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Speaker Change: Uh huh.
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