Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Kaiser Aluminum Corp (KALU, Financial) generated EBITDA of $54 million during the second quarter, reflecting strong operational performance.
- Aerospace and high-strength demand remained robust, mirroring strong first-quarter results despite a reduction in large commercial jet builds.
- General engineering demand and pricing remained stable, with shipments increasing by 6% year over year.
- Automotive conversion revenue increased by 9% compared to the second quarter of 2023, driven by modest demand improvements and improved pricing.
- The company has a strong liquidity position with approximately $618 million in total liquidity and no borrowing under its revolving credit facility.
Negative Points
- Conversion revenue for the second quarter was $369 million, a decrease of $10 million or 3% compared to the prior year period.
- Packaging shipments were negatively impacted by extended planned outages and an unplanned outage in the hot mill during the second quarter.
- Reported net income for the second quarter was $3 million, significantly down from $18 million in the prior year quarter.
- Adjusted EBITDA for the second quarter was down approximately $10 million or 16% from the prior year period.
- The company recorded a non-cash GAAP LIFO charge of $9 million due to significant inventory reduction, impacting operating income.
Q & A Highlights
Q: On aerospace, I guess taking down expectations a few quarters in a row. I guess what's changed in the last 90 days. What visibility do you have? I guess, but this is maybe a new bottom. And when should we assume the segments could return to year-on-year growth?
A: Yeah, good morning, this is Keith. We -- as we talked considerable side of our business as really not shown any debt or detrimental activity, Bill, we've seen really good movement in space, business jet continues very strong. Defense remains strong, and the area that's been somewhat challenged has been those well document widely publicized challenges that Boeing continues to have and Airbus is challenged with some of their supply chain issues. We've noted, continuing bookings of opportunities longer term, there's been a pretty successful flow of orders at the Farnborough Air Show, but we're expecting as soon as those guys get those issues and other challenges, those challenges are not being impacted by supply of raw materials at least on our end from aluminum. But when those build rates get steady and return back to expected levels then we anticipate being back in the strength on that side of the coin. We continue to have billed rates lower than expected, and we're anticipating that at some point in time, that will that will flow into reduced orders. Now from a Kaiser perspective, we have minimums in place. We have expect -- their commitments that are made and our outlook is improved for 2025 for the declarations that have been made. And so we're just anticipating, right now that until we get those build rates back up, we're just filling the pipeline a little bit right now.
Q: Great. Thanks for that. And as we think about the EBITDA margin and I think you have long wanted to return to kind of above 20% type EBITDA margins, I guess, can you help bridge, I know some investors were hoping that could even occur to reach 20% sometime next year. I guess can you help bridge, where we are today with getting back to more historical levels of EBITDA margin, how fast can that occur, given where we are today with some of the operational challenges end market challenges you have? Is this a '25 story? Or is this more like to be '26 or beyond?
A: No, Bill, after very confident that we're on the track back. We're going to be roughly around, I think, where we've been year to date, roughly around that 15% or so type margin. And if you look at some of the things that we have underway. So we announced the change of the metal strategy, which is going to deliver 150 to 200 basis points. And then you move to the new strategy that we're embarking on coated strategy, which we've indicated that we're going to deliver the 300 to 400 basis points. That puts us right back up around the 20 ish and above level on the margins. And again, we anticipate those things beginning to kick in beginning of 2025. Then you add on top of that, the expected return to higher build rates on the commercial aero side. And then with the additional capacities that we're putting in on Phase seven, which are going to deliver another 5% to 6% on the relatively higher margin automotive side, then you can see our path going back into the 20 And back to the mid-20s and higher over the next one to two years. And that's on top of getting the efficiencies back to where we've historically had those. Okay. And we can see a rise of another 100 to 200 basis points just on getting efficiencies back where we've historically had them across the portfolio of businesses. So we've got the outline pretty well directed. We're putting the investments in place, the other markets have been a little bit up and down as we've seen with some destocking and restocking. But we don't see any major detriment to our growth plans in place. So I feel very confident that we're moving quickly back to the historic levels. And we've got the right things that we're pulling right now to put us in position to take advantage of those market opportunities.
Q: On the packaging side, can you provide more details on the impact of the outages and the outlook for the rest of the year?
A: As mentioned, the outages we experienced in the first half of the year negatively impacted shipments. With the outages now behind us, we expect our packaging shipments to improve from current levels throughout the remainder of 2024. Further, we are excited to be nearing completion of the long anticipated roll coat number four line with expected qualifications beginning in fourth quarter, in line with our internal plan. This significant investment remains on budget with production slated to begin in early 2025. As previously discussed, this project is estimated to convert approximately 25% of our existing capacity to higher value added coated products, which we anticipate will benefit our total company margins by 300 to 400 basis points. Accordingly, we now expect our packaging conversion revenue to improve by approximately 3% to 4% year over year in 2024, due to improved pricing and product mix on a 2% to 3% increase in shipments, reflecting the impact of the extended outages incurred during the second quarter.
Q: Can you elaborate on the decision to exit the Sherman Texas facility and its impact on financial performance?
A: Following our annual in-depth strategic review of our operating portfolio, we made the decision to exit our Sherman Texas facility as of June 30, 2024. This resulted in a non-run rate restructuring charge of approximately $7 million associated with employment benefit plan and severance payments, which will be paid out over the next few years. The impact of our ongoing financial performance will be immaterial as we reposition our customer orders to our other facilities. In addition, we recorded approximately $2 million mark to market non-run rate noncash charge associated with certain hedges. After adjusting for the non-run-rate charges of approximately $9 million, adjusted operating income was $25 million, down approximately $12 million of 34% year over year predominantly driven by the GAAP life of charge and a quarter-over-quarter increase of approximately $3 million for depreciation and amortization expense.
Q: What is the outlook for general engineering and automotive segments for the rest of 2024?
A: While demand has remained relatively stable and strong, prices have largely held throughout the first half of the year. We are anticipating typical seasonality in the second half of the year, which is expected to be a slight headwind to demand and subsequent shipments. Further, we continue to forecast modest price compression in our outlook as demand has historically slowed in the second half of the year, and pricing remains at historically high levels. Therefore, we anticipate our 2024 shipments to improve by approximately 3% to 4% year over year, and the resulting general engineering conversion revenue to be flat to up 1% compared to 2023. For automotive, while demand remains relatively flat compared to last year, price increases enacted in late 2023 have largely held
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
