Kaiser Aluminum (NASDAQ:KALU) Corporation (NASDAQ: KALU) held its Third Quarter 2024 Earnings Conference Call on [insert date], presenting a steady performance with a slight increase in conversion revenue and a significant rise in net income. President and CEO Keith Harvey, alongside CFO Neal West, outlined the company's stable outlook for the year, strategic capital investments, and sector-specific developments.
Key Takeaways
- Adjusted EBITDA for Q3 2024 stood at approximately $50 million, with a $4 million GAAP LIFO charge.
- Conversion revenue grew 1% year-over-year to $362 million.
- Aerospace and high-strength conversion revenue dropped by 5%, while packaging revenue increased by 9%.
- Net income was $12 million or $0.74 per diluted share, an improvement from the previous year's $5 million or $0.34 per diluted share.
- A quarterly dividend of $0.77 per share was declared on October 15.
- Service center inventory levels for long products are at their lowest since 2013.
- Early signs of order recovery from semiconductor customers for plate products.
- The automotive sector saw an uptick in shipments focusing on higher value-added products.
- The packaging sector is expected to improve in Q4 with a strong outlook for 2025.
- New tariffs on aluminum imports may benefit North American manufacturing.
Company Outlook
- Anticipated conversion revenue growth of 0% to 1% for the full year 2024.
- EBITDA margin increase of 50 to 100 basis points expected, excluding GAAP LIFO effects.
- Fourth coating line at the Warrick facility to enhance margins by 300 to 400 basis points in early 2025.
Bearish Highlights
- Aerospace sector facing labor and supply chain challenges, potentially affecting shipments.
- Plate product inventories remain high, posing a risk to short-term recovery.
Bullish Highlights
- Destocking for long products has stabilized, with shipments aligning with market demand.
- Positive outlook on the automotive sector, driven by strategic investments and focus on high-value products.
- Packaging (NYSE:PKG) sector improvements anticipated, with new production lines starting in Q4 and customer qualifications in early 2025.
Misses
- Aerospace and high-strength conversion revenue saw a 5% decline.
Q&A Highlights
- Management addressed compressed scrap spreads, indicating a strategic shift towards more recycled content.
- The company remains focused on automotive platforms that are less affected by European market weaknesses.
- Kaiser is optimistic about the automotive sector's growth and continued strength into 2025.
In conclusion, Kaiser Aluminum Corporation remains cautiously optimistic about its future, with strategic investments and operational efficiencies expected to drive growth. The company is adapting to market dynamics and is positioned to capitalize on its diverse product offerings and strong market presence as it moves into 2025. Shareholders and investors can expect a detailed update on the fourth quarter and full-year 2024 results in February.
InvestingPro Insights
Kaiser Aluminum Corporation's recent earnings call paints a picture of steady performance and strategic positioning, which is further supported by data from InvestingPro. Despite the challenges faced in the aerospace sector and plate product inventories, the company's financial metrics reveal some encouraging signs.
According to InvestingPro data, Kaiser Aluminum's market capitalization stands at $1.07 billion, reflecting its significant presence in the industry. The company's revenue for the last twelve months as of Q3 2024 was $2.98 billion, with a gross profit margin of 11.24%. While the revenue growth showed a slight decline of 5.13% over the same period, the quarterly revenue growth for Q3 2024 was positive at 0.55%, aligning with the company's reported 1% increase in conversion revenue.
An InvestingPro Tip highlights that Kaiser Aluminum has maintained dividend payments for 18 consecutive years, underscoring its commitment to shareholder returns. This is particularly relevant given the company's recent declaration of a $0.77 quarterly dividend. The current dividend yield stands at an attractive 4.63%, which may appeal to income-focused investors.
Another InvestingPro Tip notes that the stock has taken a significant hit over the last week, with a 1-week price total return of -8.76%. This short-term volatility could present an opportunity for investors who believe in the company's long-term prospects, especially considering management's positive outlook for 2025.
It's worth noting that InvestingPro offers 10 additional tips for Kaiser Aluminum, providing a more comprehensive analysis for investors seeking deeper insights into the company's financial health and market position.
Full transcript - Kaiser Aluminum Corporation (KALU) Q3 2024:
Operator: Greetings and welcome to the Kaiser Aluminum Corporation Third Quarter 2024 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 with Addo Investor Relations. Thank you. You may begin.
Kimberly Orlando: Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Third Quarter 2024 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. 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 to EBITDA and 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?
Keith Harvey: Thanks, Kim, and thank you all for joining us for a review of our third quarter 2024 results. Turning to Slide 7. Our business performed largely in line with our expectations in the third quarter, as we continue to execute against our strategy to drive long-term sustainable growth and margin expansion for the company. We generated approximately $50 million of EBITDA in the quarter, which includes an approximate $4 million GAAP LIFO expense, which Neal will discuss in a few moments. As we move into our fourth quarter, we are on track to meet our conversion revenue outlook for the year as well as our outlook for year-over-year margin expansion. The long-term outlook for the markets we serve remains robust, the products we provide are industry-leading and we are continuing our disciplined approach in investing capital to meet the needs of our customers and to deliver profitable growth and margin expansion to our shareholders. We believe we have laid the foundation for continued strong progress towards these goals next year and for many years to come. I'll now turn the floor over to Neil to discuss the quarter in more detail and then I'll be back to discuss our outlook. Neil?
Neal West: Thank you, Keith, and good morning, everyone. I'll begin on Slide 9 with an overview of our shipments and conversion revenue. Conversion revenue for the third quarter was $362 million, an increase of $5 million or 1% compared to the prior year period. Looking at each of our end markets in detail, aero and high-strength conversion revenue totaled $128 million in the third quarter of 2024, a 5% decline on a 7% decrease in shipments over the prior year quarter, primarily reflecting broader supply chain challenges in the market. Packaging conversion revenue was $128 million, an increase of 9% year-over-year on improved mix and pricing. While shipments declined 2%, as we work to stabilize our production levels following the second quarter outage and destocking period earlier this year, underlying demand remained strong, as reflected in our results. General engineering products conversion revenue was $76 million, a 1% increase year-over-year on a 5% increase in shipments, pricing remained relatively stable despite uneven demand and import pressures. And finally, automotive conversion revenue was $29 million, up 3% compared to the third quarter of 2023 on a 2% decline in shipments due primarily to higher pricing and improved product mix. Additional details on conversion revenue and shipments by end market applications can be found in the appendix of this presentation. Now moving to Slide 10. Reported operating income for the third quarter of 2024 was $17 million, which includes a $2 million increase in depreciation and amortization expense over the third quarter of 2023. After adjusting for non-run rate charges of approximately $4 million related to an increase in legacy environmental reserves at our Newark facility, our adjusted operating income was relatively stable year-over-year at $21 million. Our effective tax rate continues to be in the low to mid 20% range under current tax regulations. We anticipate that our 2024 cash taxes for foreign and state taxes will be in the $4 million to $5 million range with no US federal cash tax until we consume our federal NOLs, which at the year-end of 2023 were $101 million. Reported net income in the third quarter of 2024 was $12 million or $0.74 per diluted share compared to net income of $5 million or $0.34 per diluted share in the prior year quarter. After adjusting for approximately $4 million of non-run rate charges previously mentioned and approximately $9 million of nonoperating income related to legacy land sales and settlements of prior year insurance claims, adjusted net income for the third quarter of 2024 was $8 million or $0.51 per diluted share compared to adjusted net income of $7 million or $0.46 per diluted share in the prior year quarter. Now turning to Slide 11. Adjusted EBITDA for the quarter was $50 million, up approximately $2 million or 4% from the prior year period. EBITDA margin for the quarter was 13.9%, up from 13.3% in the prior year period. The increase in adjusted EBITDA and EBITDA margin was driven primarily by higher conversion revenue, partially offset by an increase in energy costs and a higher GAAP LIFO charge. As noted by Keith, net income and adjusted EBITDA for the third quarter were negatively impacted by a GAAP LIFO charge of approximately $4 million. This quarter's LIFO charge was primarily attributed to valuing at quarter end higher inventory pounds on hand at the lower metal and inventory costs we had at the beginning of the quarter. Our higher inventory levels were primarily driven by the strong customer demand we've experienced for our packaging products. As it is difficult to forecast changes in future market-driven metal costs, along with changes in the mix of our ending inventory, we provide our outlook for adjusted EBITDA based on projected sell-through unit costs without the impact of GAAP LIFO accounting. We will continue to call out the GAAP LIFO accounting adjustments when we present our actual quarterly performance. Now turning to a discussion of our balance sheet and cash flow. On September 30th, 2024, total cash of approximately $46 million and approximately $549 million of borrowing availability in our revolving credit facility provided total liquidity of approximately $595 million. There were no borrowings under our revolving credit facility during and as of quarter end and it remains undrawn. As of September 30th, 2024, our net debt leverage ratio was 4.6 times against our target leverage ratio of 2 times to 2.5 times. Turning to capital allocation. Capital expenditures for the third quarter totaled $51 million, primarily attributed to continuing investment in our fourth coating line project at our Warrick facility. Our full year 2024 capital expenditures are now forecasted to be in the range of $180 million to $190 million. Elevated capital expenditures this year primarily reflect the work we have been doing at our Warrick facility. We expect our future annual capital expenditures to be significantly lower and more in line with our prior year's historical averages. Finally, on October 15th, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reflecting the confidence our board and management team have in our strategy and improve our profitability, reduce our net debt leverage ratio and increase stockholder value. And now I'll turn the call back over to Keith to discuss our outlook. Keith?
Keith Harvey: Thanks, Neil. Now I'll turn to our outlook. Beginning with aerospace on Slide 13. We remain on track to meet the outlook I provided last quarter for aerospace and high-strength shipments and conversion revenue. The market drivers for commercial aircraft production remain very healthy as OEMs hold years of aircraft backlog. Passenger traffic stays very strong and planes remain full. As we plan for 2025, we expect aircraft production rates to build momentum throughout the year and complement our steady offerings in defense, space, business jet and other industrial application product categories, all of which remain very healthy. I expect our aerospace and high-strength end markets will remain strong for Kaiser for years to come. We are closely monitoring the negotiation and outcome between Boeing (NYSE:BA) and Machinist Union. The timing of this resolution may have a short-term impact on demand and shipments. Now turning to packaging on Slide 14. I'd like to highlight the performance at our Warrick facility on top of the strong demand in the packaging end market following a period of destocking, which ended earlier this year. Our shipment levels rose for the fourth consecutive quarter, and the momentum continues into the fourth quarter of this year. The momentum in packaging comes at an ideal time. As we near the completion of our fourth coating line, which will shift approximately 25% of our mix to higher-margin coated products while also improving our throughput. The coating line remains a key component to our long-term strategy within this growth market. Initial commissioning has already begun, and we expect output from this new line to be a strong contributor to our performance next year as we ramp up to full production in early 2025. At full run rate, this project is expected to provide approximately 300 to 400 basis points of margin expansion to our consolidated businesses margin. Our efforts to optimize Warrick have progressed over the last few years and we look forward to sharing how this strategic investment will contribute to our 2025 EBITDA expectations and beyond as we meet with you again for our fourth quarter call in February of next year. Now turning to general engineering on Slide 15. We believe destocking has run its course within our long products, and currently, we believe shipments are matching true end market demand. To give you a look at one of the key metrics we use to determine the underlying health of this end market, service center inventory levels for long products are now at levels not seen since 2013. Low inventory conditions warrant our attention as they have historically bolstered orders as our customers generally rebuild inventory positions in the first half of any given year. For plate, while inventories remain elevated in the channel, we're seeing initial signs of order recovery from our semiconductor customers as they prepare for an improving equipment cycle in 2025. While low service center inventory levels for long products and the outlook for semiconductor plate into 2025 create an environment for improved demand, continued pricing stability will need the support of an improvement in North American manufacturing. Historically, extended periods of destocking and contracting manufacturing purchasing manager indices have generally had an adverse impact on price. However, we are encouraged that pricing has held up better-than-expected thus far due to the strength of our product lines, market position and the positive impacts of reshoring. Next, I'll turn to automotive on Slide 16. I'd like to highlight that our shipment levels are up modestly from 2023 and we remain on track to meet the conversion revenue target previously communicated on an improved mix of higher value-added products. Even as automotive production rates have adjusted lower throughout the year, the SUV and heavy and light truck platforms, where we participate, have continued to outperform the broader automotive market. Turning to Slide 17. I'll now turn to our summary outlook for the full year 2024, which is consistent with the one I shared last quarter. We continue to expect overall conversion revenue to remain stable between 0% and 1% growth as compared with 2023. And our resulting EBITDA margin is estimated to be up 50 to 100 basis points year-over-year, not including the impact from GAAP LIFO accounting. Please note that this outlook does not reflect additional delays in shipments of declared orders due to current labor or supply chain challenges within the aerospace end markets. In summary, I am pleased with our efforts this year to stabilize the business and make significant advancements at our Warrick packaging facility. I am confident Kaiser is well positioned ahead of 2025, which we expect will be a transformational year for the company, as we capitalize on key investments in several markets we serve. As always, we will remain highly diligent on our cost and focus on improving operating efficiencies. I look forward to sharing our 2025 outlook with you in February. With that, I will now open the call to any questions you may have. Operator?
Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question is from Timna Tanners from Wolfe Research. Please go ahead.
Timna Tanners: Yeah, hey, good morning. I wanted to probe the aerospace side a bit more. We are hearing from some other suppliers to the sector that there is some destocking happening. Some of this is just other suppliers slower to proceed and also just a destocking because of the lower build rates across Boeing and Airbus. So I guess, first question is, are you seeing that? And I know you said that your forecast doesn't reflect any delayed orders and challenges in the aero end markets. But with the Boeing strike not looking like it's getting resolved near-term, can you give us a little bit more color about what to expect if that proceeds? Thanks.
Keith Harvey: Yes. Hey, good morning, Timna. Yes, listen, I reflect back in our second quarter earnings call. We put out a little notice that we felt that the inventory in the channel was higher and that it could impact our shipments and conversion revenue associated with that. And we were -- we moved it down. Our outlook is to be down 2% to 3% on both shipments and revenue -- conversion revenue as compared to the record year of 2023. And so with our comments today, we've reiterated that we still believe we're within that envelope through the balance of the year. Now some color around that, again, at least as it reflects to Kaiser, we've talked a lot about the diversity of our products and our markets in aerospace and high-strength. And so that's a reflection back on defense and space, all of which we saw enhanced business through the quarter. Now as it relates to the OEMs, obviously, we're not in control of that situation. There is inventory as you would expect in that supply line because there are certain build rates that all of the large OEM airframers have been buying to and they've all reflected that their build rates aren't to those levels. But with some color specifically for us, I'm very pleased with the types and quality of the contracts we've negotiated over the years. So we built in some insurance levels to help us through those times. I can tell you that on declarations for all of the large OEM airframers, we have shipped the bulk of the declarations already through this year. So I'm really thinking, obviously, I can't predict what's going to happen with others, but I think our exposure to a prolonged outage or delay in build rates is minimal compared to what our declarations were stated for the year.
Timna Tanners: Okay. That's helpful. Thank you. I wanted to switch gears, if I could, to talk about the potential impact of further tariffs. So given the election coming up and that being topical, can you remind us kind of about how you think about further tariffs on imports of aluminum downstream products, which I think haven't been targeted as much in the past and how that could impact your business? Thanks.
Keith Harvey: Yes. Look, we're -- the majority of the businesses that we participate, I would say, with other than on the aerospace side and on semiconductor, we're mainly focused on North America for our customers and the outlets for our products. So quite frankly, additional tariffs, I believe, will help strength -- anything that helps strengthen the North American manufacturing is going to be a big positive for us. I think you've seen some momentum move on those tariffs. We've seen Canada and Mexico impose 25% tariff levels as opposed to the existing what they were maybe 10% earlier. So I think that momentum is building, Timna. And I believe, ultimately, stronger North America manufacturing and how we're positioned there that will do nothing but strengthen this company. So I believe we're moving in a positive momentum forward in the area and the question you just asked.
Timna Tanners: Okay. Thank you.
Keith Harvey: Thank you.
Operator: The next question is from Bill Peterson from JPMorgan (NYSE:JPM). Please go ahead.
William Peterson: Good morning and thanks for taking the questions and also thanks for posting the presentation in advance. I wanted to ask a few on packaging and actually a few of the other end markets too, if I may. First on packaging, it looks like the shipments didn't improve as much as expected in the third quarter, but with the full year guidance of plus 2% to 3% looks like a significant step up sequentially. I guess, were there any impacts to call out in 3Q? And I guess, how should we think about shipments in 4Q? And maybe even just saying like further, can we get back or exceed the 170-plus range we saw in the second half of 2021 run rate?
Keith Harvey: Yes. Hey, good morning, Bill. Good questions. The quarter, you might recall, as we went into second quarter, we said that we had a backlog of orders. And so quite frankly, from our delivery performance pain that we've caused some of our customers, we've been in catch-up mode. And so while we've been trying to catch up and make sure that we don't provide any disruption to our customers, we've really been moving in a way to make sure that everyone gets resolved here, everyone gets settled some. So some of the efficiency may not have been as large as we had hoped. However, that backlog is beginning to fall. And we're beginning to continue to hit the strong demand, and we're ramping up on a monthly basis with the output of the facility. So we have a very strong fourth quarter outlook in front of us. And our customers are already talking about increased levels for 2025. I'm very excited about deploying the new investment we've been putting up there because, quite frankly, that mix is going to shift for us as we move into 2025. A lot of that mix is going to be able to be done in-house on a very efficient line to complement the other three lines that we have. So our output should only improve as we move into 2025 and as we really implement the new investment we've got there at the facility. So right now, we're running every shift we can, and we believe we'll become more efficient, and we're going to have a better mix of products as we run through really fourth quarter and really getting into 2025.
William Peterson: Great. Maybe sticking on that last point on the new roll coat line. Has there been any further progress on customer commitments? What are the expectations, I guess, more granular on the timing of the qualification and ramp? Is this a few one or two quarters into the new year or more likely towards -- as we -- later in the year?
Keith Harvey: Yes. So we're -- we continue to negotiate with customers, Bill. Some of the contracts that we're discussing were really due to be up in 2026, so we're actually pulling forward some of that discussion to ensure that we can get the mix that the customers are requesting from us. So some of that's underway. We talked about, in the past, we've got probably about 70% of that capacity already contracted for and the 30% remaining is under discussion, as we speak. And so as we look at ramp rate here, so we're -- as per my comments, we're already hot commissioning certain aspects of that line. I was up there a couple of weeks ago, and progress has been very well and really looking for a start-up of the line in the fourth quarter here, and we'll begin qualifications with customer, customer product and testing for that. So we'll debug and qualify beginning in early 2025. My expectations are that hopefully, we'll reach full ramp rate. We'll begin to get to that level as we enter into the end of the first quarter or perhaps the beginning of the second quarter of next year.
William Peterson: Thanks for that color. Maybe pivoting a bit to the metal sourcing strategy. I guess, can you discuss project thus far, how much margin benefit maybe has been realized? And maybe are you seeing any impacts from tighter scrap spreads? And if so, when would you expect those might revert?
Keith Harvey: Yes. So the strategy moving forward, we've been implementing as we discussed in our second quarter call. We've got the position set up very well, but I will reiterate that the scrap spreads versus prime levels are very much compressed at the moment. And so the gain that you might expected to see from a historic or at least over the last four or five years is pretty compressed to that level at the moment. Now when will that compression end, when will spreads get better? I don't have the answer for that, Bill. All I know is that we're preparing all of our businesses to utilize more scrap, okay, more recycled content, and we'll be in a position to take advantage of whatever compression -- generally, there's some gain to be used in the recycled, and whatever is out there, we intend to maximize it.
William Peterson: Great. And if I could sneak one more, and then I can take others offline. Pivoting to automotive, obviously, there's a lot of evidence of further weakness, which obviously more so from European makers, although some domestic. I guess, first of all, can you speak to how this is impacting your business and then the types of platforms that Kaiser is levered to and what you're doing to help mitigate any of these sort of negative trends?
Keith Harvey: Yes. Bill, I think a lot of this gets down to what platforms you participate on, what products you provide. We've been in the automotive industry for about 50 years. There's a lot of products that we won't provide. We just don't see a competitive position for Kaiser. However, those that we do, and that's the extruded product side, we're really on platforms and applications that are really that benefit us. So we're agnostic to whether it's EV or an ICE (NYSE:ICE) or even hybrids in some applications. So all of those utilize the components that we provide, and that's been going very well for us. As I mentioned on the comments, we're heavily focused on light, heavy truck and SUVs. Fortunately, for us, that's holding up very well. I think you see the results from General Motors (NYSE:GM) and others, they really focus back on that category of the marketplace being -- continue to be very strong and supported by consumer sentiment. So we're on the right vehicles. We're on North America. We're not in Europe. So we're very focused with where we are with our products. And as you saw in the results there, even though the overall shipments are down in that area of automotive, our business is up. And I think we'll continuing to see some strengthening of that going into 2025. So I'm very pleased with our exposure there. As you know, it's probably our smallest position from a conversion revenue perspective, but we like where we are participating.
William Peterson: Yes, makes sense. Thanks for taking all the questions and, yes, good luck here on all the projects you have.
Keith Harvey: Thanks, Bill.
Neal West: Thanks.
Operator: This concludes the question-and-answer session. I would like to turn the floor back over to Keith Harvey, CEO, for closing comments.
Keith Harvey: Yes. Thank you. And thanks for being with us today. I look forward to updating you on our fourth quarter and full year 2024 results in February. Have a good day.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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