Kaiser Aluminum Corporation (KALU) Q1 2025 Earnings Report, Transcript and Summary

Greetings. And welcome to the Kaiser Aluminum Corporation's First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Kim Orlando with Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone. And welcome to Kaiser Aluminum' first quarter 2025 earnings conference call. If you have not yet 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 Chairman, 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 expectations. 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, 2024. The company undertakes no duty to update any forward-looking statement 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 efforts. Any reference to EBITDA in our discussion today means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. Further, Slide 5 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 for questions. I would now like to turn the call over to Keith Harvey. Keith?

Thanks, Kim. And thank you all for joining us for a review of our first quarter 2025 results. Turning to Slide 7. We're off to a strong start to the year. Despite ongoing volatility driven by recent trade policy actions, our end markets are tracking in line with the expectations we outlined in February, and our full year outlook has improved with our solid first quarter results. Operationally, we continue to drive positive results for our stakeholders with strengthening demand and effective cost management. A major focus for us is on optimizing overhead across the business, staying true to Kaiser's core principle of being a low-cost producer. Additionally, we benefited from a favorable move in metal pricing, which Neil will expand on shortly. Overall, we're encouraged by the strong momentum we've established and remain confident in our ability to sustain it through the balance of 2025. A major component of the progress we are making is bringing to market two major investments, which are instrumental to planned growth in several of our key end markets. First, our fourth coating line at our Warrick rolling mill is currently undergoing commissioning and will be moving into the customer qualification phase soon. This line plays a critical role in both our growth strategy and for the broader market, where demand for our products remains high and supply remains constrained. Our customers are eagerly awaiting these coated products and we are fully committed to meeting that demand as fast as possible, while upholding the exceptional quality standards that define Kaiser across all its end markets. Second, our Trentwood Phase VII investment project is progressing smoothly. Equipment has arrived on site and the team is currently conducting prep exercises to facilitate a seamless installation. The Trentwood team has mastered this process over the course of six major expansions over nearly two decades, expanding our aerospace and general engineering heat-treated plate capacity by greater than 2.5 times. The timing for this investment is ideal as our key end markets are expected to recover over the next several quarters. Together these investments mark the next phase of growth for Kaiser. We expect the result of these projects to drive a step change in our EBITDA and margin performance that we previously outlined for the coming years along with the continued pace of deleveraging. Next, I'd like to address the topic of tariffs. In the near-term, we believe Kaiser is well positioned to navigate market volatility in the current environment. Our geographic footprint and supply chain are predominantly North American. And our contracts are designed to be metal-neutral. We're already seeing upside in end markets where uncertainty of supply and rising import fees and cost have increased demand for domestic products. Additionally, our own supply lines have been reviewed and are well diversified, providing us with ample flexibility. Overall, we believe the current trade policy discussions taking place should have a neutral to modestly positive impact on Kaiser. We will remain nimble and act diligently on these issues as trade negotiations continue to evolve. Longer-term, reshoring is a trend we've been focused on since the COVID-19 pandemic. And we're witnessing credible and tangible signs this is occurring. Our geographic footprint gives us a strong advantage and with the largest product offering of highly engineered aluminum products in the market, we are very well positioned to grow alongside our valued customers. Now let me turn the call over to Neal for more details on our first quarter results. Neal?

Thank you, Keith, and good morning, everyone. Before I begin, I'd like to remind everyone that effective January 1st, we changed our inventory valuation methodology from last-in, first-out or LIFO to weighted-average cost. We believe this change better reflects the physical flow of inventory and changes in metal costs. For comparability purposes, we have re-casted our 2023 and 2024 results to reflect the weighted-average cost methodology for those periods. Therefore, all year-over-year and comparisons to year end 2024 for this presentation and going forward will be based on these re-casted results. Please refer to our press release issued on April 2nd for further details on this matter. I'll now turn to Slide 9, for an overview of our shipments and conversion revenue. Conversion revenue for the first quarter was $363 million, a decrease of approximately $4 million or 1% compared to the prior year period. Looking at each of our end markets in detail, Aerospace and High Strength conversion revenue totaled $121 million, down $16 million or approximately 12%, reflecting a 10% decline in shipments over last year. As indicated during our year-end earnings call, we expected our shipments to be impacted in the near-term from disruptions stemming from commercial aircraft OEM order patterns, which affected the entire supply chain. While commercial aircraft OEM demand was down, our business jet, defense and space demand remained strong. Packaging conversion revenue totaled $127 million, up $9 million or approximately 8% year-over-year on an improved mix of higher value added products. Conversely, our shipments declined 9% due to a reduction in bear products as we begin to pivot towards higher volumes of coated material, work to finish commissioning our new row coat line and begin qualifying products with our customers. Aside from this short-term nuance, the underlying demand for our products remains strong and we are working closely with our customers to prioritize production and deliveries as we move through this transition. General engineering conversion revenue for the first quarter was $84 million, up $3 million or 4% year-over-year on a 12% increase in shipments. Broader market factors, specifically around trade policies under potential negative impact on import availability created a favorable environment in this end market, driving higher demand and solid pricing. Our long standing commitment to the delivery of high quality Kaiser Select products, along with industry leading service continue to support our customers and garner a premium in the marketplace. And finally, automotive conversion revenue of $32 million increased modestly by 2% year-over-year on a 9% decrease in shipments, primarily due to improved product mix of higher value added products. Additional details on conversion revenue, shipments by end market applications can be found in the appendix of this presentation. Moving to Slide 10. Reported operating income for the first quarter was $41 million. After adjusting for non-run rate costs of approximately $2 million, primarily restructuring costs associated with plant and corporate staffing reductions, our adjusted operating income was $43 million up $18 million year-over-year. Our effective tax rate for the first quarter was 25% compared to 23% in the first quarter of 2024 due primarily to the timing of certain tax credits. For the full year 2025, we continue to expect our effective tax rate before discrete items to be in a low-to-mid 20% range under current tax regulations. Additionally, we anticipate that 2025 cash tax payments for federal, state, and foreign taxes will be in the $5 million to $7 million range. Reported net income for the first quarter was $22 million or net income of $1.31 per diluted share, compared to net income of $18 million or $1.12 net income per diluted share in the prior year quarter. After adjusting for non-run rate charges of approximately $2 million, adjusted net income for the first quarter 2025 was $24 million or adjusted income of $1.44 per diluted share compared to adjusted net income of $10 million or adjusted income of $0.62 per diluted share in the prior year period. Now turning to Slide 11. Adjusted EBITDA for the first quarter was $73 million, up approximately $19 million from the prior year period. Adjusted EBITDA as a percentage of conversion revenue improved by approximately 550 basis points from the first quarter of 2024% to 20.2%. The improvement in adjusted EBITDA was driven by improved pricing and mix of higher value-added products, approximating $3 million as well as an increase in metal lag gain of about $16 million from the prior year period. The increase in the metal lag gain was driven primarily by the spike in Midwest transaction price following the announcement for increased aluminum tariffs earlier in the quarter. Furthermore, we continue to drive operational improvements by optimizing efficiencies, leveraging recent capital investments, executing strategic metal sourcing initiatives, and maintaining a disciplined approach to cost management across the business. Now turning to a discussion of our balance sheet and cash flow. On March 31st, 2025, total cash of approximately $21 million and approximately $555 million of borrowing availability on our revolving credit facility equated to a strong liquidity position of approximately $577 million. There were no borrowings under our revolving credit facility as of the quarter end, and it currently remains undrawn. As a reminder, our senior notes interest costs are fixed at $48 million annually, and we have no debt maturing until 2028. As of the end of the first quarter, our net-debt leverage ratio improved to 3.9 times from the 4.3 times at year-end, tracking towards our target leverage ratio of 2 times to 2.5 times. Turning to capital allocation. We generated solid cash flow from operations of $57 million during the first quarter with our capital expenditures totaling $38 million, resulting in a free cash flow of approximately $19 million. For the full year 2025, our capital expenditures are projected to be in a range of $120 million to $130 million, including some remaining costs for the fourth coating line project at work and completion of our Phase VII expansion at Trentwood. As both projects are nearing completion or are well underway, we do not anticipate any material impact on our guidance from trade policy discussions. As a result, we expect to generate more than $100 million of free cash flow for the full year of 2025, driven by the relatively low capital expenditures and reduced working capital demand across the portfolio, which will drive further reduction in our net-debt leverage. Finally, on April 15th, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reinforcing their confidence in our long-term strategy to drive increasing profitable growth and maximizing stockholder value. And now I'll turn the call back over to Keith to discuss our 2025 outlook. Keith?

Thanks, Neal. As we look ahead to the remainder of 2025, our outlook for all of our end markets remains consistent with the outlook we provided during our February call. Starting on Slide 13 with Aero and High Strength. The commercial aerospace supply chain is showing signs of regaining health. Large commercial aircraft production is off to a better start in 2025 with new aircraft orders and deliveries having rebounded, fueling even stronger backlogs than before. For Kaiser specifically, steady customer order flow gives us confidence that any potential impact from short-term inventory imbalances or delays of certain deliveries due to trade-related actions will have minimal impact on our performance. Activity remained steady at strong levels in our defense, space, and business jet applications, just as it has for several quarters. Let's move on to Packaging on Slide 14. We are commissioning our new roll coat line after which we'll begin customer qualifications in the process of ramping production with the expectation of reaching full run rate levels late in the second half of 2025. This is fully in line with the expectations we shared on our February call. Importantly, the timing of this significant investment is highly favorable following four consecutive quarters of constrained capacity for our products with the present North American production footprint unable to meet rising market demand. We are committed to bringing our new capacity online as quickly as possible to meet our customers' growing needs. Turning now to General Engineering on Slide 15. We saw strong momentum in general engineering demand throughout the first quarter. In our long products, we remain encouraged by the steady improvements we are seeing in our order books, even with inventories in the supply chain remaining at historic low levels. For heat-treated sheet and plate products, we have been benefiting from trade related uncertainty, which is driving demand toward Kaiser and other domestic supply. Additionally, we expect the completion of our Phase 7 expansion project at our Trentwood rolling mill in the second half of this year, will enable us to meet the growing needs of our customers for general engineering heat-treated plate demand well into the future. Finally, turning to automotive on Slide 16. We remain well positioned in automotive. While it represents a smaller portion of our overall business, our strength lies in the specific platforms we serve, which are primarily SUVs and light truck end-use application. Our geographic footprint and alignment with these high demand segments support ongoing stability, and resilience in this end market despite the expectation for North American industry production to be flat-to-down modestly in 2025 versus last year. Now turning to our summary outlook on Slide 17. Given the recent market volatility, it's important to remind you of our philosophy and how we manage our company. First, we manage for the long-term. Which means quarterly results may be lumpy at times and progress may accelerate or pause as determined by market conditions and our resulting actions. Through it all, we will manage as we always have with a long-term strategic focus on our served end markets with differentiated products and services that meet or exceed the needs of our customers. Second, we maintain a disciplined approach to capital allocation to secure and improve our position with our customers to meet their growing needs and deliver long-term solid returns for our shareholders. And finally, we work diligently to minimize the risk to the overall business in any environment with the mantra that we manage for not through economic diversity, which is the driving force for our focus on cost, preferred market positions, and financial strength with dynamic liquidity management. With that, our market outlook for 2025 remains unchanged at this time. We continue to project 5% to 10% growth year-over-year in conversion revenue for 2025. Additionally, we are raising our full year 2025 EBITDA expectations 5% to 10% above our re-casted 2024 adjusted EBITDA of $241 million. Reiterating that earnings in the second half of the year, excluding the metal lag tailwind in Q1, will be growing as our new investments come online. With that, I will now open the call to any questions you may have. Operator?

[Operator Instructions] Our first question comes from the line of Bill Peterson with JPMorgan. Please proceed with your question.

Yes, hi, good morning, everyone, and thanks for taking the questions. I have questions on the end markets, but first, I want to ask about margins and maybe the guidance before that. So I guess, first of all, excluding the metal AGs, what drove the quarter-on-quarter margin progression? Is this a matter of fixed cost absorption? And then for the guidance, if we think about the midpoint of the value added revenue and EBITDA guidance, both up, I guess, 7.5% at the midpoint that would imply year-on-year sort of flat margins at 16.5% and then a step down, I guess, quarter-on-quarter into the back half of the year. So how should we think about the cadence and the trajectory of the - I guess in terms of margins through the balance of the year?

Okay. Hi, good morning, Bill. Hi, thanks for the question. So I think one of the things we want to make pretty clear on our outlook and how guidance, we knew that we had made an inventory change, a way that we look at that. And the reasons we did that is through an analysis, we really felt that weighted average cost, it really better reflected the management of inventory physically through our business and a more timely recognition of market price changes. And we re-casted that and our re-casted numbers really helped prove that analysis out. And you'll see the - in the Q, a comparison of how had we stayed on LIFO, what the numbers would have looked like, especially in the first quarter as related to what we proved. So that was the change that took place and metal just happened to move in that quarter and the average over that period was relatively high and we had a tailwind on that. And so we wanted to call that out and say, okay, that transpired. But getting back to the core part of the business, when you're looking at it, the quarter came in as we expected and perhaps a little better than we expected given the challenges that took place with all the tariff discussions and all this. And just to give you a little bit of insight into that, when President Trump came out with the full-blown tariffs, we took a deep dive in the whole company and I think those were the - could be the worst-case at the time. And we really convinced ourselves that our supply chain is well-positioned. We have flexibility. Most of our business, as we said, was focused on North America. So that gave us a lot of confidence in that whatever we're going through right here is really going to be neutral to positive for Kaiser Aluminum. And then we saw that in the order structure that took place during the quarter, we started to see business start to navigate our way where historically it may have gone to imports and other things. So overall, we believe that situation bodes well for Kaiser. Now from a margin perspective, Bill, if you go back and you look and we stated that the journey was recovering back to the mid-20s of our business, the mid 20% margin. And where we're at about 16.5% now. Again, we haven't initiated the investments yet. They are just coming online. And as we start to deploy those, the crucibles of what we said the returning back to that still hold true. So we see 300 basis points to 400 basis points for the entire business coming up once we hit that full run rate. We're starting to see metal - the metal supply situation that we expected to deliver 150 basis points to 200 basis points. That started to normalize and recover into the first quarter with metal spreads that they were. So that's still on track. And then we'll start getting back into the aerospace recovery with the new investment and then back to getting another additional 100 basis points to 200 basis points on getting back the efficiencies in the operation. So it still holds true. We're still focused on delivering up to the mid-20s, mid to high '20s on the margin. On the result, on the pace of that, right now, we look at to be in the 16% to 17% some type margin but that could expediate itself as soon as we deliver these investments and start supplying that business.

Yes, great. Thanks for that comprehensive answer. I'd like to kind of walk through some of the end markets here and maybe starting with packaging and I think you already were alluding to some of this, but I guess how should we think about the shipments when we think about the first quarter being down, I think you talked about deprioritizing bear products and focusing on coated. But we assume a similar focus on coated and value-added continuing in the third quarter - the second quarter and then into the back half of the year? And I guess for this - I think you might have mentioned, but the 300 basis points to 400 basis points, does this include the new packaging contracts kicking in during the course of this year and into next year?

It will, Bill, and it really starts to accelerate in 2026. So we have new contracts. But as you know, we're finalizing a couple of major contracts. We've made good progress during the quarter and bringing those to fruition. But when we start delivering, you will start to see and as our outlook has given, we've stated some pretty hefty increases in our conversion revenue and you will really start to see that ramping up in the second half of the year. We had pretty good improvement from the conversion revenue in the first quarter, and that's on existing contracts and really just starting to gravitate to more in the first quarter of the higher-margin coded. That really will start to come online in the second half. We talked in the second quarter, it's really going to be about proving the line, getting those customer qualifications, and then as quick as possible, start to delivering product to customers. And so we're confident of that demand. We're confident of the need. We're not meeting the needs of those customers yet. We want to hit that and we will. But you'll start seeing that ramp up in the second half very strongly as regards to packaging.

Okay. Thanks for that. And then maybe thinking about auto real quick. Some of the third parties are talking about light auto production down high-single-digits. I know you're on certain platforms, but I guess what gives you confidence that the trucks and SUVs can remain somewhat insulated and maybe if there is further weakness or weaker than you're expecting, what kind of downside protection do you have in some of your auto contracts? And I guess, are there any in maybe general engineering or other ones too that there's some broader weakness?

Yes. So, automotive is pretty interesting for us, Bill. As I said, we're on select programs, platforms. And you could take a look at the headlines that have been taking place. So we're really across all those platforms, especially around like trucks and SUVs. And while you may hear a certain manufacturer going down or are slowing down somewhat, you see the other two competitors perhaps strengthening shipments on light trucks and adding capacity. So we have strong positions in all of those and the parts that we supply really go across each one of those platforms. So - and some of these are new platforms for us, Bill. So that's what gives us confidence in our outlook, even knowing that the demand may soften through the year. And the other thing I'll add is that on the programs, I think the last note or statistic I saw was we're still about 70% to 80% of the demand is on light trucks and SUVs. And so, if even if it comes down, we're going to come down on that. The other components that we have that are more broad-based Bill, they're like anti-lock brake systems, the valves and thanks for those structural components, every car out there, whether it's an EV or an ICE vehicle is going to have anti-lock brake systems. So the programs that we're on, we could go down if the overall demand decrease, but with the - if you recall, we reset prices for these products and that's coming through in our numbers in Q1 and we have new programs that are launching. So I feel pretty confident about we should be able to weather the storm. A reminder to you and all our others, the auto is our smallest, it's about 8% of our business. So we know that there's still would be some impact, but the impact would be relatively small on us. And you brought up a good comment about general engineering. I'm actually feeling pretty bullish about our position on general engineering. I was a little concerned when the inventory levels started to move down. But even with - and sometimes we can see a month-to-month change with really high metal customers may try to get in orders that are that are - have a high - a lower metal cost. So you may see some lumpiness in month-over-month. But I've been tracking all of our orders on a daily basis. And the order rate continues to be good. I won't say it's super strong. We said it at low inventories, but we're really positioned well in this market. We bring a broad product offering to this market. We mainly service it through service centers and some select customers, right, through like semiconductor and other type of applications. And we're seeing some pretty good green shoots starting to come from that side of the business as well. And so, with what's taking place with the trade policy discussions, I actually think it's a positive multiplier for Kaiser Aluminum on the general engineering side of the business. So - and the last thing, I know you didn't specifically ask it, but on the aerospace side, we said in our February outlook that we were going to see the first half probably a little slower because of the inventory and supply chain issues that some of the folks were having. That's playing out for us as we expected, but we also see production beginning to ramp back up. They're moving toward more build rates. So it's in-line and that's the reason we reiterated our outlook for the full year. So overall, I would have to say we came out with a great quarter from my perspective, given the market environment we're in and then we raised expectations for the full year beyond that. So in the volatile world that we're in right now, I'm feeling pretty good about where our business currently lies.

Yes. Actually my last question was on aero and I think you largely answered it. But just to be clear, I guess, where do you think we stand in the destocking cycle, in particular within commercial? It sounds like your other three parts of your aerospace are tracking at least the plan. I'm just trying to get a sense for how should we think about the trajectory and maybe exit rate this year on the aerospace side?

Yes. Well, the great thing that's going on, Bill, and it's data driven. As I said in my comments, so we're starting to see the build rates grow from where they were last year, and this is across both major airframers here it's trekking as we expected. So for instance, on Boeing, they're really moving towards the 38% rate. I think in Kelly's comments, he talked about moving to 42% before the end-of-the year. And then moving to 47% as quick as they can next year. So that's in alignment with where we saw things beginning to ramp back up and so I think we're probably about midway through that destocking. We expect to see continued orders. I think another thing from a Kaiser perspective, we - on our contracts, we try to manage for the minimums and maximums that we provide. So we feel pretty confident about where we are on that. And so I think we're going down the path as soon as those ramp rates begin to come back. I think you're going to see the supply chain get healthier as fast as they can ramp.

Great. Thanks for taking all the questions we had and lots going on. Good luck navigating this sort of challenging macro and micro, and we'll look forward to catching up soon. Thank you.

Okay. Thanks, Bill. Appreciate the insights.

[Operator Instructions] Mr. Harvey, I'm seeing no other questions. I'll turn the floor back to you for final comments.

Thank you, operator. We remain well-positioned to deliver on our strategic growth plan following the largest investment cycle in our recent history. We believe strengthening market position, persistent focus on reducing costs, and our steady deleveraging are going to drive improved value for all of our stakeholders. We thank you for your interest in Kaiser Aluminum and look forward to sharing our progress with you later this summer on our second quarter call. Goodbye.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.