Kaiser Aluminum Corporation (NASDAQ:KALU) Q4 2023 Earnings Call Transcript
Kaiser Aluminum Corporation (NASDAQ:KALU) Q4 2023 Earnings Call Transcript February 22, 2024
Kaiser Aluminum Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings and welcome to the Kaiser Aluminum Corporation's Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando, Investor Relations. Thank you ma'am, you may begin.
Kim Orlando: Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's fourth quarter and full year 2023 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, 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, 2023, which will be filed on February 23rd, 2024. 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 reconciliation are outside of our control and or cannot be reasonably predicted or provided without unreasonable effort. 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 five 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?
Keith Harvey: Thanks, Kim, and thank you all for joining us for a review of our fourth quarter and full year 2023 results. Turning to slide seven. I am very pleased with the hard work and dedication of the entire Kaiser team this past year, which enabled us to set the foundation for long-term, sustainable and increasingly profitable growth in the years to come. Our focused strategy, unwavering execution, and commitment to our customers allowed us to end the year in a solid position, with ample resources to implement our growth initiatives. We delivered fourth quarter results above our expectations, with $52 million of adjusted EBITDA. Despite continued destocking in some of our markets and inflationary pressures, our efforts to lower cost and improve operating efficiencies are taking hold across the platform.
An exceptionally strong aerospace mix experienced during the quarter, also contributed to our strong results. Performance in the fourth quarter and full year 2023 establishes a solid foundation for the company, as we transition toward completing our investments and executing our growth strategy for 2024 and the future. I'll now turn the call over to Neal for more details on our 2023 results. Neal?
Neal West: Thank you, Keith. Good morning, everyone. I'll begin on slide nine, with an overview of shipments and conversion revenue. While the demand environment for the full year of 2023 was mixed, conversion revenue for the year was a record $1.47 billion, an increase of $83 million or 6% compared to 2022, while total shipments were down 58 million pounds, or 5%. Looking at each of our end markets in detail, aerospace and high strength product demand remained very strong and by year end our conversion revenue surpassed the peak levels we experienced in 2019, prior to the pandemic, which is well ahead of our initial expectations. We delivered fourth-quarter and full-year conversion revenue ahead of our outlook as we benefited from a more favorable product mix than anticipated.
Our unique ability to flex our capacity in our Trentwood facility as general engineering demand remains soft, further contributed to our performance. For the full year 2023, aero/high strength conversion revenue totaled $533 million, up $177 million or 50%, reflecting higher pricing on a 36% increase in shipments over last year. In packaging, destocking activity with our beverage customers stabilized during the fourth quarter. However, as we noted in our third quarter call, we experienced destocking in our coated food products in the fourth quarter, which makes up a considerable amount of our shipments. For the full year of 2023, packaging conversion revenue was $503 million, down 9% year-over-year. Shipments during the year were down 7% or 43 million pounds over 2022, which as a reminder, was impacted by our magnesium related declaration of force majeure.
In addition to shipments being impacted by destocking in the market, primarily by beverage related products in the first half of the year, followed by the coated food products in the fourth quarter, conversion revenue was impacted by a less favorable product mix, which negatively affected our results. In general engineering, reduced demand for plate products along with increased availability of imports persisted through Q4. We expected pricing to remain under pressure for these products until semiconductor demand returns. In regard to our GE long products, we saw destocking beginning to stabilize in the fourth quarter, following five quarters of steady destocking. General engineering conversion revenue for 2023 was $305 million, down 17% year-over-year due to a 29% reduction in shipment as a result of destocking, primarily for plate products, on higher pricing to address inflationary cost.
And finally, automotive demand remained relatively stable as supply chain issues continue to offset fairly good demand. For the full year 2023, auto conversion revenue was $116 million, up 21% over 2022, and an 8% increase in shipments due primarily to higher pricing to offset inflationary cost. Additional details and conversion revenue in shipments by end market, applications can be found in the appendix of this presentation. Now moving to slide 10. Reported operating income for 2023 was $96 million, after adjusting for corporate restructuring costs of approximately $5 million, adjusted operating income was $101 million, up $66 million from 2022. Our effective tax rate for the full year 2023 was 16% compared to 22% in 2022, primarily due to an R&D credit created during the year.
Cash taxes for the full year 2023 was approximately $2 million. For the full year 2024, we expect our effective tax rate before discrete items to continue to be in a low to mid 20% range under current tax regulations. We anticipate that our 2024 cash taxes or foreign and state taxes to continue to be in a $2 million to $3 million range, with no US Federal cash taxes, until we consume our federal NOLs, which as of year-end 2023 were $101 million. Reported net income for 2023 was $47 million, or an income of $2.92 per diluted share, compared to a net loss of approximately $30 million, or a loss of a $1.86 per diluted share in 2022. After adjusting for a net total of approximately $4 million of pre-tax non-run rate gain, including the previously mentioned restructuring charge, adjusted net income for 2023 was $44 million, or an income of $2.74 per adjusted diluted share, compared to an adjusted net loss of approximately $9 million, or a loss of $0.55 per adjusted diluted share in 2022.
Now turning to slide 11. Adjusted EBITDA for 2023 was $210 million, up approximately $68 million from 2022. Adjusted EBITDA as a percentage of conversion revenue improved by approximately 400 basis points from 2022 to 14.3%. The improvement in adjusted EBITDA was primarily the result of higher pricing that captured a higher cost of alloys and other inflationary costs with a higher mix of aerospace product shipments. In addition, we continue to stabilize operations following the significant supply chain issues we experienced at our work rolling mill over the last two years and remain focused on cost reductions on operational efficiencies across our platform, including corporate and plant overhead related costs, to address the impact of inflationary cost.
Partially offsetting these actions throughout the year, as noted earlier, was destocking and packaging and general engineering, along with continuing inflationary cost, which we believe are beginning to subside. Now, turning to a discussion of our balance sheet and cash flow, we generated approximately $69 million of positive free cash flow for the full year 2023, primarily due to lower capital expenditures than anticipated and improved anticipated inventory management. At the end of December 2023, total cash of approximately $82 million and approximately $517 million of net borrowing availability on our revolving credit facility, provided total liquidity of nearly $600 million. There were no borrowings under the revolving credit facility during and as of the quarter end December 31st, and it remains undrawn.
Our total liquidity position remains strong. As a reminder, our senior notes interest costs are fixed at $48 million annually and we have no debt maturing until 2028. As of December 2023, our net debt leverage ratio improved over 200 basis points to 4.6 from 7 times at year end 2022, moving towards our targeted leverage ratio of 2 to 2.5 times. Turning to capital allocation. Our strategy remains focused on supporting the growth of our business, while concurrently returning value to our stockholders in the form of quarterly cash dividends. Our full-year capital expenditures came in below forecast at $143 million which was predominantly driven by the timing of submission for bill payments related to our growth capital projects. We now project for the full year 2024, that our capital expenditures will be in a range of $170 million to $190 million, which reflects the carryover from 2023 due to timing.
Our roll coat project remains on schedule with the majority of the remaining $110 million will be spent in 2024. The balance of capital expenditures will be for ongoing sustainability and additional growth projects, which Keith will cover shortly. Additionally, we returned approximately $50 million in 2023 to our shareholders through dividend payments, making it our 17th consecutive year of dividend payments to our shareholders. On January 11th, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, which underscores the continuing confidence our Board and management team have in our longer term strategy to improve our profitability, and increase stockholder value. And now I'll turn the call back over to Keith, to discuss our 2024 and beyond outlook.
Keith?
Keith Harvey: Thanks, Neal. Now I'll turn to our outlook for the fiscal year of 2024, beginning with Aerospace on slide 13. The strong momentum we've been experiencing in aero and high strength shipments is expected to carry-over into 2024 and beyond, supported by improved declarations by our customers for large commercial jets and strong demand for our products projected for defense, space, business jet and other industrial high strength applications. It has become increasingly evident that as demand for our products grows, our customers expect us to invest for additional capacity to meet their needs. Therefore, we are moving forward with the initial investment in our previously announced Phase VII expansion at our Trentwood rolling mill.
When initially proposed in early 2020, the total cost of the Phase VII investment was estimated to be approximately $225 million over several years, with an expected 20% to 25% increase in total capacity. However, the Phase VII launch was delayed due to the pandemic. In the time since then, our team has been able to further evaluate and provide options to deliver the initial incremental increase of capacity with more modest investments. Currently, we expect initial investments of approximately $25 million to yield an additional 5% to 6% increase of overall capacity for aerospace and general engineering products, which will be the first of multiple investments planned over the next several years at Trentwood. The culmination of which is expected to deliver the earlier announced increase in capacity.
We expect capital outlays for this initial investment will be approximately $10 million this year, with the balance applied in the first half of 2025. The increased capacity is expected to be available to our customers beginning in the second half of 2025. Our team will continue to evaluate efficient lower cost options to deliver the full capacity expected from the Phase VII expansion, to meet the needs of our customers and deliver value to our shareholders. 2024, aero and high strength shipments and conversion revenue are expected to improve approximately 1% to 2% versus 2023, as we now expect improving general engineering demand in the second half of the year, which utilizes much of the same capacity as some aerospace products. Turning now to packaging on slide 14.
As discussed previously, we began experiencing destocking from our food packaging customers in the second half of 2023. We felt that destocking in these products would not be as prolonged as we experienced on the beverage side of our business in late 2022 and through most of 2023. Based on discussions with our customers, we now expect destocking for these products to moderate and end sometime during the first quarter of this year. Our customers have indicated expected sales growth in 2024 in the mid-single digits above 2023 levels. As a result, we now expect our packaging shipments and conversion revenue to improve by approximately 5% to 7% in 2024 year-over-year. We have a number of exciting and impactful initiatives underway at our Warwick facility in 2024.
Our new roll coater installation is progressing well and is on time for completion by the end of the year, with production expected to commence in 2025. As we've previously stated, this is a high-value project expected to convert approximately 25% of our existing capacity to higher value added coated products. Fully implemented, this project is expected to have a 300 to 400 basis points impact on overall margins. To-date, we have a large portion of this capacity already committed with discussions underway for the balance. Upon exiting our hot metal supply agreement with the adjacent Alcoa smelter at year end 2023, we've successfully implemented a new metal input strategy at the rolling mill, utilizing a significantly higher mix of used beverage cans and recycled scrap in our mix, which will greatly improve our greenhouse gas footprint.
Once this strategy is fully implemented this year, we estimate the run rate impact of this revised strategy will deliver a consolidated margin improvement by 150 to 200 basis points on a full year basis. We remain excited about the potential for our packaging business. With strong secular growth expected in the 3% to 5% range, coupled with our long-standing customer relationships with multi-year contracts and a focus on higher margin, value added coated products, we're confident in the positive outlook for this business longer term. Now turning to general engineering on slide 15. Distributors continued to reduce inventories for both plate and long products through the fourth quarter of 2023. However, we are experiencing an increase in order rates for all general engineer products since the start of 2024 and believe destocking could end early this year.
We now feel the fourth quarter of 2023 was the trough for demand and we expect improving shipments and conversion revenue as we progress into 2024. More specifically, as semiconductor plate demand gains momentum in the second half of 2024 and into 2025, we expect capacity from our initial Phase VII investment will support additional growth in these markets and provide the catalyst for future planned investments at our Trentwood operations. As a result, we expect shipments in 2024 to improve by approximately 5% to 6%, with resulting conversion revenue to be flat to up 1% compared with 2023, as we expect modest pressure on prices earlier in the year as demand improves. Longer term, we are maintaining a positive outlook for our general engineering business, on the whole, given the reshoring of certain manufacturing industries back to North America.
Next, I'll turn to automotive on slide 16. Higher build rates for trucks and light vehicles in North America have driven a steady recovery in the automotive market throughout 2023, which we expect will carry-over into 2024. As a result, we expect our 2024 auto shipments and conversion revenue to increase 3% to 5% from 2023 levels. Turning to slide 17, I'll now turn to our summary outlook. For the full year 2024, we expect demand will continue to improve across all of our key markets. As a result, we expect conversion revenue to improve 2% to 3%, with expected EBITDA margins improving by 70 to 170 basis points year-over-year. Manufacturing efficiencies are also expected to improve as demand recovers and our operations continue to stabilize. These efficiencies are expected to help partially offset expected higher labor and medical cost.
In summary, despite all of its challenges, 2023 turned out to be a strategically important year for Kaiser, as we laid the groundwork necessary to capture the numerous opportunities ahead of us. The combination of our strong market position as a key supplier in diverse end markets with multi-year contracts and with key strategic partners, strong liquidity position and a flexible nature of our cost structure positions us well for long term sustainable growth. With that, I will now open the call to any questions you may have. Operator?
See also 15 Easiest English-Speaking Countries to Immigrate to from US and 15 Tips and Tricks To Build Wealth Without Buying Real Estate.
To continue reading the Q&A session, please click here.
