Kaiser Aluminum Corporation (KALU) Q1 2021 Earnings Report, Transcript and Summary

Welcome to the First Quarter 2021 Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] I will now turn the call over to Melinda Ellsworth.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's first quarter 2021 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 call. Joining me on the call today, our President and Chief Executive Officer, Keith Harvey; Senior Vice President and Chief Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey. Before we begin, I'd like to refer you to the first three slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission including the company's Annual Report on Form 10-K for the full year ended December 31, 2020 and Form 10-Q for the quarter ended March 31, 2021. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the Appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted or provided without unreasonable effort. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run-rate items for which we've provided reconciliations in the Appendix. At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Keith Harvey. Keith?

Thanks, Melinda, and welcome everyone to Kaiser Aluminum's first quarter 2021 earnings call. The Kaiser team delivered another strong quarter as pandemic-related conditions impacting our markets began to normalize. All our major end markets continued to improve sequentially from second half 2020 results through the first quarter in 2021. We also reached a significant milestone in the evolution of the company on March 31 by successfully completing the acquisition of the Warrick Rolling Mill in Evansville, Indiana from Alcoa, adding the attractive growing aluminum packaging end market to our portfolio of served markets. With the addition of Warrick, we'll now have a significant position in the North American beverage and food can markets, which highly complements our strong position in aerospace and high-strength automotive and general industrial end markets. I'll add additional color to our outlook with the addition of Warrick to our full year 2021 consolidated outlook later in the call. Our first quarter 2021 results reflect adjusted EBITDA of approximately $38 million with improving value-added revenue of $172 million, which I remind you did not include Warrick results. As mentioned earlier, we saw improvement in each of our served markets with double-digit growth in value-added revenue and our general engineering and automotive-focused businesses in the quarter. Aerospace and high-strength is expected to continue to improve through the balance of the year with demand continuing to improve on business jet and defense-related programs. Demand for our products related to large commercial airframe production appears to have stabilized with continued recovery expected through the 2023-2024 time period when we expect demand similar to levels experienced in 2019. Auto demand, as expected, is robust with multiple new programs successfully launched and underway. We have experienced slight delays in some programs mainly due to the chip shortage, which has been well publicized. While we anticipate production interruptions experienced in the first half of the year to potentially be recoverable in the second half of the year, we could see a slight impact to expected full year automotive value-added revenue if shortages continue. Our general engineering customers are experiencing strong demand, and we are going through a period of restocking as lead times from mills continue to extend. We expect continued strong demand for our general engineering products into the second half of the year. North American service center shipments for soft alloy rod and bar products experienced a 20-year record high in March, which gives you some insight as to the strong demand on our mills. Demand for our general engineering plate products driven by continued strong semiconductor and other application demand also remains very robust. Overall, with improving end market demand, our mills have increased their throughput during this period. Manufacturing efficiencies are improving. And as planned, we have been slow to add back overhead and fixed operating costs reduced in 2020, which favorably impacted our results for the quarter. I'll now turn the call over to Neal to provide more detail on our first quarter results. Neal?

Thanks, Keith, and good morning, everyone. Turning to Slide 8, value-added revenue for the first quarter of 2021 of $172 million increased $19 million or 12% compared to the second half 2020 run rate, demonstrating improvements in each of our end markets, driven by continued strength in demand for our general engineering, automotive, and defense applications. Adjusted EBITDA of $38 million increased $8 million compared to the second half 2020 run rate, reflecting higher value-added revenue and a cost structure more fully aligned with volume as we aggressively flex costs in operations during 2020. For the first quarter of 2021, we reported a solid 21.8% BITDA margin, reflecting strong operating leverage on increasing volumes. Comparing our strong first quarter 2020 results to the first quarter of 2021, value-added revenue declined by $45 million or 21%, reflecting the COVID-19-related impact in commercial aerospace demand mitigated in part by the continued strength in demand for our defense-related applications and stronger year-over-year demand for our general engineering and automotive applications. Adjusted EBITDA for the first quarter of 2021 declined $22 million compared to the prior-year quarter, reflecting the negative sales impact of approximately $26 million, partially offset by lower manufacturing and corporate overhead costs. First quarter 2021 EBITDA margin of 21.8% was down from the record 27.4% EBITDA margin in the prior-year quarter, reflecting the lower volume in operating cost. Turning to Slide 9, aerospace high-strength value-added revenue for the first quarter 2021 of $71 million improved slightly, increasing $2 million or 3% on a 23% increase in shipments compared to the second half run rate, which as a reminder, included approximately $15 million of additional revenue recognized in the third quarter of 2020, related to modifications to customer declarations under multiyear contracts. The increase in value-added revenue in shipments reflects continued strength in demand for our defense-related application and improving demand for business jets, as commercial aerospace demand while stabilizing, remains weak. Compared to our record first quarter 2020, aerospace high-strength value-added revenue for the first quarter of 2021 declined $59 million or 46% on a similar percentage decline in shipments reflecting the COVID-19 impact and our commercial space demand, which again was partially offset by continued strength in demand for our defense-related applications. Turning to Slide 10, compared to the second half 2020 run rate, automotive value-added revenue for the first quarter 2021 of $28 million demonstrated continued improvement, increasing $3 million or 11% on an 8% increase in shipments driven by the continued launch and ramp-up of new programs. Compared to the prior-year quarter, automotive value-added revenue for the first quarter 2021 increased $4 million or 15% on a 12% increase in shipments, reflecting continuation of the improving trend and demand, the ramp-up of new programs and a more favorable mix. Moving to Slide 11, general engineering value-added revenue of $72 million in the first quarter of 2021 increased $13 million or 23% on a 24% increase in shipments compared to the 2020 second half run rate, reflecting continued strong underlying demand and restocking in the supply chain. Compared to the prior-year quarter, general engineering value-added revenue increased $11 million or 18% on a 14% increase in shipments, reflecting strong service center demand, restocking in the supply chain and continued growth in underlying demand for semiconductor and automotive applications. Additional detail on value-added revenue and shipments by end market applications can be found in the appendix of this presentation. Moving to Slide 12, reported operating income for the first quarter of 2021 was $17 million. Adjusting for $7 million of non-run-rate charges including $11 million of Warrick acquisition fees and integration costs adjusted operating income was $24 million, down from $46 million in the prior-year quarter primarily reflecting the change in EBITDA as previously discussed. Reported net income for the first quarter of 2021 was approximately $5 million compared to $29 million in the prior-year quarter. Adjusting for non-run-rate items, adjusted net income for the first quarter of 2021 was $10 million compared to adjusted net income of $30 million in the prior-year quarter. The $10 million adjusted net income for the first quarter 2021 primarily reflected the impact of lower operating income and an increase of approximately $6 million of pre-tax interest related to our bond offering completed in the second quarter of 2020. For the first quarter of 2021, we recorded a tax benefit of approximately $300,000 primarily due to the impact of the Warrick acquisition on estate tax rates and related valuation allowances in addition to the recognition of excess tax benefits from stock-based compensation. Long term, we continue to believe our effective tax rate will be in a mid-20% under the current tax regulations. We anticipate that our cash tax rate will remain in the low-single digits until we consume our federal NOLs of approximately $95 million as of year-end 2020. As reported, earning per diluted shares were $0.28 in the first quarter 2021 compared to the $1.81 in the prior-year quarter. Adjusted earnings per diluted share was $0.64 and $1.90 for the first quarter 2021 and 2020, respectively. Turning to Slide 13, as Keith mentioned, on March 31, 2021, we completed the acquisition of the Alcoa Warrick LLC. We funded the $670 million purchase price with cash on hand in assumption of other post-employment liabilities. Total cash outflow at closing was approximately $624 million, which also reflected working capital adjustments and transaction fees. The final settlement amount is still subject to proposed closing adjustments, which are expected to be finalized by the end of the second quarter. As of March 31 and after reflecting the first quarter results and Warrick transaction costs, total cash of approximately $128 million and more than $360 million – $367 million of borrowing availability on our revolving credit facility provided total liquidity of approximately $495 million. There were no borrowings under the revolving credit facility during the quarter and the facility remains undrawn. With the addition of Warrick, we have revised our anticipated capital spending for the full year 2021 to be $75 million to $85 billion pending any further growth initiatives. We will continue to manage several back office support operations under transition service agreements with Alcoa through the remaining part of the year as we continue to complete our system integration processes and ramp up our support staffing. Furthermore, we anticipate an additional $3 million to $4 million of non-run-rate, onetime costs related to the integration to occur through the end of the year. And now, I'll turn the call back over to Keith to discuss our acquisition of Warrick and update our 2021 outlook. Keith?

Thanks, Neal. I'd like to now focus on our recent acquisition of the Warrick rolling mill and outline our priorities as we begin the integration of Warrick into Kaiser. As we stated when we announced the purchase in late November 2020, the Warrick facility has been well-maintained and is operated by a deeply talented and experienced management team and workforce. Warrick's reputation as a quality and strategic supplier to its North American customer base is solid and well-established. For decades, the Warrick rolling mill has served the North America packaging market with a unique and substantial capability in coated and bare products for beverage and food packaging applications. We expect to continue serving these markets with the intent to meet the growing needs of our customers and further differentiate Warrick as the premier supplier in the markets we serve. Here's how we intend to achieve this. First, we are working with the Warrick team and Alcoa to fully transition the rolling mill and support services to Kaiser. We have established a detailed plan to transition back office services, previously delivered by Alcoa to Kaiser over the next six to 12 months. As we work toward completion of transitioning these services, our goal is to ensure the rolling mills' focus remains on servicing our customers at the highest level of customer satisfaction with regards to quality and delivery, as we know market demand is high and they are counting on us to meeting our commitments. Second, over the next 90 days, we plan on engaging with the Warrick management team and our key customers to develop a comprehensive, long-term strategic plan for Warrick and the packaging end markets we serve. We will be specifically focused on determining products, capacities, and needed investments to better align our priorities with our packaging customers' needs for aluminum sheet products in North America. Finally, once we have consensus on our strategic path forward, we'll work with our customers to execute those strategies, which will likely include a number of organic investments focused on maximizing the potential of Warrick. As you know, we have considerable experience in successfully implementing this type of measured growth. We executed six similar organic expansions at our Trentwood rolling mill over a number of years to meet the needs of our aerospace customers, who experienced a very similar growth curve in demand much like we are seeing in the packaging markets today. Our success in responsibly investing to meet the needs of our strategic partners, while also satisfying the expectations of our long-term stakeholders is well documented. We intend to apply these learnings at Warrick to capitalize on the secular growth opportunities we are seeing in the packaging market. The outlook for aluminum packaging is very promising. North American can demand was up approximately 5% year-over-year in 2020 and is projected to increase an additional 3% to 5% in 2021 and beyond. Aluminum is the material of choice as sustainability requirements increase and its characteristics including infinite recyclability continue to highlight the advantages of its use over other materials. Consumer preference continues to favor aluminum versus other packaging materials in areas such as carbonated soft drinks, craft beers, spiked seltzers and water. Finally, historical North American aluminum sheet capacity previously dedicated to the packaging market has been reallocated to other end markets, including automotive and industrial applications, further challenging the aluminum packaging supply/demand balance domestically. With ongoing work performed on maximizing mix, price, and increased volumes during recent contract renewals, considerable progress has been achieved with limited investment to this point. Our initial discussions with customers depicts strong demand over the next five to 10 plus years with an equally strong desire to partner with a domestic supplier that can deliver highly sustainable aluminum sheet products to meet their needs. We anticipate discussing capital investment plans for maximizing these and other opportunities in our portfolio in our next earnings call in July if not before. So, as we wrap up our prepared remarks, I'll reiterate that we're very excited about the long-term potential of our businesses and the future appears much different and extremely more positive than at this time a year ago. We have and will continue to manage the businesses safely with safety protocols mindful of the still existent, but shrinking threat of the COVID-19 virus. We reported solid first quarter results. And with the completion of the Warrick acquisition, we now embark on new opportunities for long-term growth. The full-year outlook for 2021 we provided during our fourth quarter earnings call in February anticipated value-added revenue for our existing businesses would be up approximately 5% to 10% year-over-year with an adjusted EBITDA margin comparable to 2020, driven by strong growth in automotive, defense, and general engineering applications along with lower cost. With the acquisition of Warrick now completed, we have updated the full-year outlook for 2021 to reflect approximately $375 million to $400 million of additional value-added revenue over the balance of the year and reiterate our expectation of a consolidated adjusted EBITDA margin comparable to 2020. As Neal noted earlier, we have also updated our outlook for capital spending, anticipating $75 million to $85 million in 2021 with the potential for additional investment in the packaging business as we continue to refine our strategic path forward. We also remain committed to fund additional capacity for continued growth in the aerospace and high-strength markets as customer demand and full recovery in these markets warrant. We are well-positioned for continued long-term growth with a diversified portfolio and strong secular growth trends in each of our served markets. Packaging, with sustainability-driven conversion from plastics and other materials, to aluminum and beverage and food can applications, aerospace and high-strength with the return in global passenger air travel expected. Automotive extrusions with continued light weighting of passenger car and light truck vehicles and our general engineering end markets experiencing strong demand driven by the recovery of the economy and heavy restocking within the supply chain, which continues to show a growing preference for domestic supply. We have multiple expansion opportunities identified to accelerate our growth in our served markets, and we have sufficient liquidity to fund that growth. We anticipate providing additional details around our future investment plans during our July earnings call if not before. With that, I'll now open the call for questions.

Thank you. [Operator Instructions] And we have our first question from Josh Sullivan with Benchmark Company. Please go ahead, sir.

Good afternoon.

Hi, Josh.

Can you just talk about – now that Warrick's closed, what do the contract structures for can look like? Are they multiyear? Are we coming up on any renegotiations where the market is getting a little tighter?

Sure. What we found is that most of these are multiyear contracts that are in place. During the diligent process and as we have closed on Warrick, we've actually been in the middle and have completed some contract renewals and some extensions in place. We still have some outstanding that will be renewed over the next couple of years. And as we discussed, Josh, we're also – as we go through the strategic planning review, we'll be looking to what form and what type of length of period of contracts we'll have going forward. So there's a lot of activity currently and expected in the near future on contract renewal and extensions.

Got it. And then it sounds like you guys are still going through where the capital investments might go into Warrick. But what about the existing $80 million or so if aerospace has still got a – it seems like there's a lot of capacity there. Where is the current CapEx kind of going into?

Sure. So if you look at the existing businesses we have and it remains true, typically, we've said the sustaining CapEx and/or growth projects are roughly 75% of depreciation for the business. And then when you really – when you roll in the Warrick, we're looking at an additional roughly $20 million, $25 million of sustaining CapEx and some growth projects that they have already identified and we're funding.

And then just going to the semiconductor demand in industrial, there's obviously some large CapEx announcements out of the semiconductor manufacturers. How long of a cycle do you think that demand for Kaiser's plate will last with regards to that semiconductor buildup?

It's sometimes tough to predict how long these last, Josh. But I can tell you we're in our second year in this go-around of extremely strong demand. As you see, as more and more things require chips and we too are excited about the recent announcements for domestic manufacturing being supported here in North America, we think that demand is – while it may still not lose some of its cyclicality, that demand keeps going up, and we're well-suited. The Kaiser Select plate we supply there is a preferred product, and we're well-positioned with our service center customers and with the OEMs in supplying that. So we think that's a long-term good growth potential for us.

Got it. Thank you. I'll jump back in the queue.

Thanks, Josh.

And thank you. We have no further questions in queue. I will now turn the call over to Keith Harvey for closing remarks.

Okay. Thank you for your time and interest in Kaiser Aluminum. And I look forward to updating you on our second quarter results and our outlook and plans for the balance of 2021 during our second quarter earnings call in July. Thank you very much. Have a good day.

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.