Kaiser Aluminum Corporation (KALU) Q4 2021 Earnings Report, Transcript and Summary

Hello and welcome to the Fourth Quarter 2021 Earnings Conference Call. My name is Brandon and I will be your operator for today. [Operator Instructions] I will now turn the call over to Melinda Ellsworth. And Melinda, you may begin.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum’s fourth quarter and full year 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 are President and Chief Executive Officer, Keith Harvey; Executive Vice President and Chief Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey. Before 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 when filed the company’s Annual Report on Form 10-K for the full year ended December 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 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 have 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 thank you for joining us and a review of our fourth quarter and full year 2021 results. Our fourth quarter and full year 2021 adjusted EBITDA earnings were $46 million and $193 million respectively, reflecting the strong demand environment for our packaging, general engineering and automotive applications, and continued recovery in commercial aerospace, while demand for our business jet and defense applications remained strong. With the backdrop of a strong demand environment, we faced a unique set of operational challenges as we continue to navigate supply chain issues, labor constraints and higher input costs, which impacted our fourth quarter and full year results. As discussed in our October call, we expected a number of the supply chain issues primarily being experienced at our Warrick facility in the third quarter to continue through the balance of the year, along with an expected negative impact to our earnings as a result of higher magnesium cost incurred after one of our largest magnesium sources, US-Mag, declared force majeure and significantly reduced our contracted magnesium supply as we moved into the fourth quarter. While these and other cost impacted our fourth quarter earnings, we made good progress addressing and mitigating the impact of most of these issues as we move through the quarter. We believe the supply chain issues we experienced during most of 2021 have been mitigated, resolved or addressed with the exception of challenges we are continuing to work through with the timely supply of metal at our Warrick facility and slower than expected recovery at US-Mag. While the labor market remains a challenge at several of our smaller facilities, labor shortages, which hampered our ability to maximize the market opportunities during most of the year, have been addressed. And as we entered 2022, we are back to being fully staffed at most of our operations, including Trentwood and Warrick, our two largest facilities. Finally, our commercial teams have been very successful passing through price increases and instituting contained metal and alloy pass-throughs and commodity surcharges to offset the majority of the higher material and other inflationary costs going forward into 2022. Additionally, higher inflationary costs have also triggered producer and consumer price index price increase provisions contained in many of our long-term contracts. While 2021 was certainly a very challenging year, we achieved a number of major milestones, which reflect the strength of our organization and demonstrated our ability to perform while operating in a very demanding environment. Our teams delivered record safety performance in 2021, even as we hired and trained hundreds of new employees. We also delivered record claim-free performance to our customers in 2021. My thanks to all our employees for continuing to perform very well as we work through yet another year of a COVID impacted work environment. We completed the transformational acquisition purchasing the rolling – the e Warrick Rolling Mill and reentering the food and beverage packaging markets in North America. While we are becoming more excited about the acquisition, the people and numerous business opportunities, the complexity of extracting the business from Alcoa, standing up separate systems and processes, decoupling the rolling mill and positioning this business as a stand-alone entity have proven to be even more challenging than anticipated. However, we expect the integration process to be substantially complete by the end of the first quarter in 2022 as we continue to focus on the physical separation of the facility from the adjacent smelter and power plant. As I noted, the strong outlook for this business continues to exceed our expectations. As we exited 2021, operating efficiencies across all our plants began to improve, along with continued strong demand across all markets, setting the stage for a much improved outlook for 2022. I will have more on the ‘22 outlook following Neal’s detailed discussion on fourth quarter and full year 2021 results. Neal?

Thanks, Keith. Turning to Slide 8, value-added revenue of $1.1 billion for the full year 2021 increased 59% or $414 million compared to the full year 2020. The increase in value-added revenue was primarily driven by the acquisition of our packaging business, which contributed $389 million in 2021, representing 9 months of value-added revenue. Value-added revenue for our aerospace high-strength applications continued to improve from the second half 2020 trough. Demand for our business jets and defense applications remained strong, while commercial aerospace continues to improve with the ongoing recovery in air travel. On a year-over-year basis, our Aerospace high-strength value-added revenue declined to $315 million or 15% and a 7% decline in shipments compared to the prior year, which reflected a record first quarter and strong first half 2020. Also as a reminder, 2020 results reflected the benefit of $15 million of additional revenue recognized in the third quarter of 2020 related to the modifications to 2020 customer declarations under multiyear contracts. Automotive value-added revenue of $97 million for the full year 2021 increased 16% year-over-year and a 12% increase in shipments. While demand remains strong, growth for our automotive applications was tempered as supply chain constraints related to the semiconductor chip shortage impacted production levels. The year-over-year increase in shipments also reflected the impact of the COVID-19-related automotive supply chain shutdowns during the second quarter of 2020. Value-added revenue for our general engineering applications reflected a record $297 million, an increase of 25% year-over-year and a 27% increase in shipments. Strong demand throughout the year was driven by a strong underlying demand, particularly for semiconductor and automotive applications, service center restocking and the impact of re-shoring. Fourth quarter results reflected similar trends to our end markets has experienced throughout the year. Overall, value-added revenue in the fourth quarter 2021 increased 109% to $316 million from $152 million in the prior year period, primarily reflecting $131 million of value-added revenue from the packaging business. Aerospace high strength value-added revenue continue to reflect improving trends, increasing 29% to $82 million and a 36% increase in shipments compared to the prior year period. Value-added revenue for automotive extrusions decreased 11% to $23 million on an 8% decrease in shipments driven by ongoing shortages of semiconductor chips. Demand for our general engineering applications continued to remain strong, increasing 20% to $73 million, a 19% increase in shipments. Additional details on value-added revenue and shipments by end market applications can be found in the appendix of this presentation. Moving to Slide 9, adjusted EBITDA for the full year 2021 of $193 million increased $39 million compared to the prior year period, which reflected results from a record first quarter of 2020 and the benefit of the additional $15 million related to the previously noted 2020 customer declarations. The year-over-year increase in adjusted EBITDA reflected the benefit of the acquired packaging business in addition to improvements in automotive and general engineering applications. The increase in adjusted EBITDA was negatively impacted by $27 million of higher costs related to supply chain inefficiencies, labor costs related to recruiting and training, rapidly increasing costs related to energy, freight and other materials and transitional costs associated with the integration award. Adjusted EBITDA as a percentage of value-added revenue was 17.3% for the full year 2021 as compared to 22.1% in the prior year period. Adjusted EBITDA for the fourth quarter of 2021 was $46 million, an increase of $17 million or 61% compared to the prior year period, reflecting the addition of the packaging business and improvement in aerospace high strength and general engineering applications, partially offset by the higher costs primarily related to the magnesium and Warrick Metal supply issues Keith mentioned. Adjusted EBITDA as a percentage of value-added revenue was 14.5% in the fourth quarter of 2021 as compared to 18.8% in the prior year period. Moving to Slide 10, reported operating income for the full year of 2021 was $64 million, adjusting for $37 million of non-run-rate charges, primarily reflecting $28 million of onetime professional fees and integration costs associated with the Warrick acquisition. Adjusted operating income was $101 million compared to $102 million in 2020. Adjusted operating income in 2021 reflected the increase in EBITDA previously discussed, and $37 million of higher depreciation and amortization expense related to the Warrick acquisition. Reported net loss for the full year of 2021 was $19 million compared to reported net income of $29 million in 2020. Adjusting for the non-run-rate items noted above and a $36 million pretax impact associated with the refinancing of our $350 million, 6.5% senior notes completed in the second quarter of 2021. Adjusted net income for 2021 was $39 million compared to adjusted net income of $48 million in the prior year. For the full year 2021, we reported loss per diluted share of $1.17 compared to earnings per diluted share of $1.81 in 2020. Adjusted earnings per diluted share were $2.40 and $3.01 for 2021 and 2020 respectively. Our effective tax rate for the full year 2021 was 23%, reflecting our expected blended federal and state tax rate. Long-term, we continue to believe our effective tax rate will be in the mid-20% range under the current tax regulations. Our federal NOLs as of year-end 2021 increased year-over-year to $187 million, reflecting the impact of the tax-related bonus depreciation associated with the Warrick acquisition. Our net cash tax in 2021 was $6 million. And we anticipate our cash tax rate will remain in the low to mid single-digits until we consume our federal NOLs. Turning to Slide 11, our adjusted EBITDA of $193 million funded our 2021 cash requirements, including capital investments, interest, cash taxes and dividends. Working capital increases were driven by increased inventory and customer receivables due to higher shipments primarily associated with the inclusion of packaging and higher metal costs. We completed the $670 million acquisition of Alcoa Warrick LLC on March 31, 2021. The purchase price, net of other post-employment benefit liabilities was funded with cash on hand for a total cash outflow of $609 million. In addition, we paid $28 million related to adviser fees and other one-time professional fees associated with the acquisition. During the second quarter of 2021, we proactively refinanced our $350 million 6.5% unsecured notes due in 2025 with a new issuance of $550 million, 4.5% unsecured notes due in 2031. The new financing served to significantly reduce the interest rate, extend the maturity and increased liquidity, providing net proceeds of $161 million. Capital spending for the full year was $58 million, primarily related to critical sustaining capital projects and cash returned to shareholders through quarterly dividends was $47 million. At year-end 2021, total cash of approximately $303 million and more than $367 million of borrowing availability on our revolving credit facility provided total liquidity of $670 million. There were no borrowings under revolving credit facility during the quarter and the facility remains undrawn. And now, I’ll turn the call back over to Keith to discuss 2022 outlook. Keith?

Thanks, Neal. Turning now to Slide 13 and our outlook for 2022, we see further strengthening in demand for our products across all our major markets. Aerospace demand in 2021, while down from the full year of 2020, due mainly to record shipments in the first quarter of 2020 continued to strengthen throughout the year. Value-added revenue for these products in the second half of 2021 versus the trough experienced in the second half of 2020 improved 20%. Declarations by our major OEM customers for 2022, along with continued strong business jet and defense demand support our outlook in 2022 for additional value-added revenue growth of 15% to 20% year-over-year in this very important market. Both Airbus and Boeing have reported increasing sales in single aisles and freighters, along with increasing passenger miles being traveled. And we are experiencing increased bookings activity not seen since the first half of 2020. We are positioned very well in these markets with multiple year extensions achieved in 2021, adding to our existing contracts. We continue to expect full recovery for aero demand as compared to 2019 to occur in the 2023-2024 time period. Turning now to Slide 14, general engineering value-added revenue in 2021 grew 25% year-over-year, driven by strong North American demand from a resurging economy and low inventories at service centers. We see continued demand in restocking occurring in 2022 with strong demand expected to support an additional 10% to 20% of value-added revenue growth year-over-year. We have considerable flex capacity available to serve our general engineering customers due to the continued volatility in the automotive markets from the ongoing chip shortages and depressed aerospace plate demand. Our ability to capture these additional opportunities in 2022 is enhanced by our return to full employment at these facilities and the decline of COVID-related staffing challenges and the impact of the Omicron virus continues to subside. Turning now to Slide 15, automotive value-added revenue for our extruded products grew 16% in 2021. While year-over-year demand improved, results were muted by the continued chip shortages, which significantly limited North American auto production. We see these challenges continuing into 2022, limiting growth again this year. That being said, we are forecasting year-over-year value-added revenue to improve an additional 10% to 20% as strong demand for SUVs, crossovers and light trucks continue. We remain confident that once supply issues with chip production have been rectified, strong demand for our products will continue to improve. Current applications, along with the major shift towards the electrification of vehicles requiring lightweight solutions will continue to drive increased demand for our highly engineered extruded aluminum products. Turning now to Slide 16 and a review of our packaging outlook. Demand for food and beverage packaging continues to be robust. North America demand for our products continues to exceed supply, and our capacity is fully committed for 2022. With the full four quarters of shipments this year, improved pricing and better mix, we expect our value-added revenue to increase 35% to 40% year-over-year. Contract discussions with packaging customers through 2024 have mostly been completed. And we have had multiple discussions for supply beyond 2024. We have been very pleased with the outcomes achieved on volumes, price mix and commodity pass-through enhancements in our new agreements. Likewise, our customers have appreciated our strategic approach to the North America packaging market, our commitment to best-in-class customer satisfaction for quality, delivery and performance of our products and our commitment to disciplined investments to meet their growing needs. Case in point is the installation of the previously announced roll coat line at our Warrick mill, which is expected to be fully operational and qualified in 2024. This line will supply additional BPANI type coated products for our food and beverage packaging customers beyond our existing lines. The addition of this new roll coat line will allow us to convert approximately 25% of our current output at Warrick to higher-margin coated products and delivers a strong return significantly above our cost of capital. Our customers have been very supportive of our actions. And we have worked to secure this investment with their long-term support during recent contract discussions. Turning now to Slide 17 and additional information on 2022. As stated earlier, we expect our integration of the Warrick Rolling Mill to be substantially complete by the end of the first quarter in 2022. In recognition of the growth in the markets just outlined and additional opportunities we have identified, we intend to make substantial investments across our platform in 2022. In addition to the new roll coat line, we have a number of other projects planned for growth, sustainability and quality. Total CapEx plan for 2022 is approximately $200 million with approximately 60% of that focused on growth initiatives. While a small portion of the total CapEx is targeted for the initial engineering work for the Phase 7 expansion for general engineering and aerospace plate at Trentwood, no decision with respect to the timing to begin this next phase expansion has been made. Additionally, approximately $30 million is allocated for refurbishing our large number one plate stretcher Trentwood. As you may recall, this investment is in lieu of a previously announced $145 million planned purchase of a new stretcher announced prior to the pandemic. While we will take a multiple week outage beginning in the third quarter of this year for this project, the low in aerospace demand and an extensive preparation period allowed for this lower cost but a highly efficient use of capital to further strengthen our operations and reliability for our aerospace and general engineering customers at Trentwood. Finally, with our acquisition of Warrick, our major maintenance for the year will increase by approximately $20 million to now $40 million, reflecting the addition of the Warrick Rolling Mill in our portfolio. As we move through 2022, we expect our EBITDA margins to begin to strengthen as we returned to a more normal operating environment with improving efficiencies, more normalized cost and improved commercial conditions. Consolidated margins are expected to improve to the 17% to 20% level for the full year, strengthening as we progress through the year. EBITDA to net debt ended 2021 at a 3.9x multiple. We remain committed to our financial guidelines for debt leverage and fully expect to continue to reduce leverage to be at or near our targeted multiple of 2x. Confidence in the secular growth of our markets, our ability to generate cash during a period of heavy investment, along with our commitment to continue creating value for our shareholders is reflected in the recent 7% increase in our dividends. We are in an exciting period for our company, as we manage growing demand across all our markets. As I noted, during the second half of 2021, we successfully completed multiple multiyear contract agreements and extensions with key strategic partners and are engaged in additional discussions to significantly expand beyond the positions achieved in 2021. Our growing businesses will be complemented by the cost initiatives we have planned, the higher use of recycled content and additional investments expected to further improve plant capacities and efficiencies. We reiterate that with the portfolio of businesses we have, the investments we intend to make and expected secular growth available to us in the markets we serve, we expect the Kaiser portfolio can deliver approximately $2 billion of value-added revenue annually with EBITDA margins in the mid to high 20% range. Turning to Slide 19 and a summary of today’s remarks, we have a strong diversified portfolio positioned to support secular demand growth for aerospace, packaging and automotive applications with solid growth expected to continue for our general engineering applications. Our market position remains solid with strong customer relationships and multiple multiyear contracts in place with strategic partners to support long-term profitable growth. We will continue our disciplined investment approach to capitalize on the various opportunities available to us in the markets we serve with strong focus on profitable growth, quality and improving efficiencies. We remain committed to our long-standing capital allocation priorities, prudent liquidity management and conservative debt leverage guidelines. Our strategy remains intact. And we are well positioned to deliver value over the long-term of approximately $2 billion of value-added revenue, with EBITDA margins in the mid to high 20%. Thank you. And I’ll now open the call for any questions you may have.

Thank you. [Operator Instructions] And from Goldman Sachs, we have Emily Chieng. Please go ahead.

Good afternoon and thanks, Keith and Neal for the update today. My first question is just around sort of the margin profile that you’ve guided to for this year, 17% to 20%. I guess what’s the path to getting back towards the upper end of that guidance range? Could you perhaps frame what you need to see in terms of magnesium metal supply normalized and perhaps what you are expecting from an end market demand perspective across packaging orders in aerospace and a recovery there that gets you to perhaps the higher end of that range?

Yes, certainly and good afternoon Emily. Well, I think from the results and experiences we had in 2021, you can see that we had plenty of opportunity, but we also had many challenges, which reflect the cost in the portfolio. A number of these, as I mentioned in my comments have been addressed through various things that we have been able to achieve either commercially or internal in operations. I did call out continuing concern about magnesium supply and the metal supply that we have with our suppliers into the Warrick operation. I believe if you – if we move back that process and we look forward, the contractual agreements that we’ve signed, the mix management we’ve been able to achieve in prices, I think the top line is going to be in place once our investments are in to really support our proclamation of where we intend to go with our margins. Our challenge is to really get back to the – once we get past the distraction of the integration that we experienced at Warwick last year and really muddle through the remaining supply chain issues, I think we are going to be fully on the path to achieving those, improving year-over-year until those investments are in and those new mixes are attained.

Great. Thank you. Maybe just really explicitly though, in terms of some of the metal supply and magnesium supply issues, what sort of the timeframe you think it would take for that to normalize?

Well, on the mag issues, we are addressing as you know, that’s not all within our control. The mag supplies from a global perspective and from the force majeure domestically, we are working through that. We are working to continue to diversify our supply base on those issues. So – and with the enhancements we have made with the pass-through opportunities with customers on those, we expect those issues to be muted in 2022 versus 2021. With regard to the metal supply issues that we are dealing with, if you look prior to this, the smelter, the rolling barrel and the power plant were fully integrated under one owner prior to this acquisition. And now, they are not. And the performance that we are looking for and perhaps in the past hasn’t been in place. That has impacted the smelter – the performance at the Warrick rolling facility. And we are working to get resolution to those issues as we speak. And the positive on this is that we have identified. We have established the standards expected. And we are working with the suppliers to get to that as quickly as we can here in 2022.

Great. That’s really helpful. Just one last one, if I might squeeze it in is just around the CapEx. Wondering if you could give us what the Warrick roll mill CapEx was embedded into the $200 million this year? And I’ll leave it at that. Thank you.

Certainly. It’s approximately 50% in that range for this year for the new rolled coat line, 50% to 55%.

Great. Understood. Thank you.

Thank you.

[Operator Instructions] Okay. It looks like no further questions at this time. We will now turn it back to Keith Harvey for closing comments.

Alright. Thank you for joining us today. And I look forward to updating you on our first quarter results and our outlook for the balance of 2022 during our first quarter earnings call in April. Goodbye.

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