Kaiser Aluminum Corporation

Welcome to the Kaiser Aluminum Second Quarter 2022 Earnings Conference Call. My name is Darrell and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. During the question and answer session, if you have a question, please press 01 on your touchtone phone. I will now turn the call over to Melinda Ellsworth. Melinda, you may begin.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's second quarter and first half 2022 earnings conference call. If you've 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 Neil West, and Vice President and Chief Accounting Officer Jennifer Huey. Before we begin, I'd like to refer you to the first three slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's annual report on Form 10-K for the full year ended December 31, 2021. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Reconciliations of certain forward-looking non-GAAP financial measures to comparable GAAP financial measures are not provided because certain items required for such reconciliations are outside of our control and or cannot be reasonably predicted or provided without unreasonable effort. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items for which we've provided reconciliations in the appendix. At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Keith Harvey. Keith?

Thanks, Melinda, and thank you all for joining us for a review of our second quarter 2022 results. Our businesses delivered $41 million of EBITDA in the second quarter. in what turned out to be a very challenging quarter due mainly to ongoing supply chain issues at our Warwick rolling mill, which supplies sheep for beverage and food packaging in the North American markets. For the last few quarters, we've been communicating how performance of our main supplier of magnesium, U.S. Magnesium, and the Alcoa Warwick smelter, which supplies a portion of our metal requirements, have struggled to provide us with contracted, consistent, and conforming supply of material and have negatively impacted our results. And while we have worked diligently over the last several months to minimize the impact on our business and our customers, both issues worsened when U.S. MAG abruptly stopped all shipments and the smelter's performance deteriorated substantially in June. These worsening conditions have continued to negatively impact our ability to run low-cost, efficient operations at the Warwick Rolling Mill. In addition to a lengthy period of unacceptable performance by both suppliers, USMAG's abrupt and unexpected change forced us to declare force majeure on shipments of sheet products from the Warwick Rolling Mill for our packaging customers in early July. These two supply issues combined have been a drag on earnings of approximately $20 million through the first half of the year. Allow me to provide more detail on these supply issues and what actions we have and are taking to put these issues behind us. Regarding our supply of magnesium and the events which led to our declaration of force majeure at work on July 7th, As we previously stated, USMAG declared force majeure over nine months ago in September of 2021. During this period, we have received little to no communication on either the cause of the disruption or plans and timelines to cure their issues and return to normal operations. In the last nine months, we have received approximately 50 percent of our expected contracted volumes until mid-June, when USMAG unexpectedly ceased all shipments to us. Since USMAG's force majeure declaration, we have been establishing and qualifying a number of new suppliers to minimize our reliance on USMAG and make up more than the projected shortfalls in USMAG's deliveries based on their projected allocations. with no pre-warning at all to the cessation of all shipments of magnesium, we were unable to replace the remaining balance of U.S. Mag's reduced supply to the Warwick operation on such short notice. In the announcement to our customers, we stated we expect shipments in the month of July to be impacted as much as 30 to 40 percent and as much as 50 percent for the balance of the third quarter in each case based on contracted deliveries of magnesium at the time and assuming no further deliveries from USMAG. We're in daily communication with our customers on our efforts to establish new magnesium supplies and contain this issue to third quarter shipments. And the situation has improved over the last two weeks as USMAG has provided additional material and we continue to identify and qualify additional supplies. We now believe shipments will be higher than the levels in our previous announcement based on the progress we've made, and we expect to return to full production sooner than previously anticipated. As we previously discussed, we initiated litigation against USMAG in April of this year in connection with USMAG's force majeure declaration. Now moving to the supply and performance issues of Alcoa smelter on the Warwick site. We receive approximately 30 percent of our metal supply for the Warwick rolling mill from the Alcoa smelter, mainly in the form of molten aluminum, when the smelter is operating effectively. While the smelter's performance has negatively impacted the efficiency and financial performance of the rolling mill for several quarters now, The smelter's performance degraded further in the second quarter, resulting in the curtailment of one of the three operating lines due to reported operational challenges. Furthermore, replacement ingot to make up the shortfall in conforming molten metal deliveries was not delivered on a timely basis, further impacting our operations. While we will continue to work with Alcoa to attempt to work through the operational challenges at the smelter and mitigate the impact of those challenges on the Warwick Rolling Mill, we are in the process of qualifying other hot metal sources for the Warwick Rolling Mill to ensure we will have an alternative sources of supply. The Warwick Rolling Mill has run successfully in the past without metal from the smelter. And going forward, we are preparing for the mill to run without this smelter as part of our plans to meet long-term financial and sustainability objectives and lower the carbon footprint of the rolling mill. With the intent to continue strengthening and diversifying Warwick's supply chain and meet the objectives we've set for our packaging business, there are a number of initiatives underway at the Warwick plant that will ultimately reduce our need for third-party magnesium and hot or cold prime metal sourcing. The Warrick plant has one of the largest and most sophisticated cask houses in the world, and we have plans to further improve its ability to utilize more scrap and rely less on current metal sources. Last week, we initiated startup of our new coated scrap melter that will enable us to process in excess of 100 million pounds that painted and bear low-cost scrap annually. We are also developing and currently testing new alloys with significantly lower magnesium content and enhanced recyclability characteristics to meet our and our customers' needs for more highly sustainable products. Commercially, all new negotiated contracts for beverage and food can sheet have increased closed-loop return scrap provisions, thereby providing our business with a greater supply of low-cost scrap. These changes are impactful and provide insight into just a few of the areas we've already acted to strengthen this business. Again, these issues have mainly impacted operations that are rolling them. All other operations have had no impact from the US MAG or Alcoa smelter issues. Looking forward now on our market outlook for the remainder of the year, we anticipate continued strong demand in all markets with the exception of automotive, where despite continued tepid shipments due to supply chain shortages, we have been successful in improving prices. We delivered another solid quarter on improving aerospace shipments with continued strengthening demand in defense, commercial, and business jets expected for the remainder of the year And we have declarations reflecting continued improvement in these applications moving into 2023. Our general engineering business remains strong with continued solid demand in semiconductor and other various applications for plate and extrusions, along with improved pricing. Packaging demand remains exceptionally strong. As noted in last quarter's earnings call, We have begun a long-planned multi-week outage at our Trentwood facility to refurbish our heavy gauge stretcher there. In addition, the new roll coat line investment at Warwick continues to move forward with startup and qualifications scheduled for the second half of 2023 with full production slated for early 2024. I'll now turn the call over to Neil to review the quarter in more detail, and then I'll be back with some closing comments. Neil? Thanks, Keith.