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spk02: Welcome to the Kaiser Aluminum third quarter 2022 earnings call. My name is Vanessa 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 zero then one on your touchtone phone. I will now turn the call over to Melissa Ellsworth. You may begin.
spk00: Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's third quarter and first nine months. 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 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 constitutes forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially in the forward 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 those comparable GAAP financial measures are included in the earnings relief. Reconciliations of certain forward financial measures are not provided because certain items required for such reconciliations 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?
spk05: Thanks, Melinda, and thank you all for joining us for a review of our third quarter results. Starting to slide six, while our third quarter results reflected significant headwinds primarily related to supply chain issues at our Warwick rolling mill, we made tremendous progress to position Kaiser for success moving forward. EBITDA declined to $31 million in the third quarter, predominantly reflecting the headwinds associated with the US MAG and Alcoa supply chain challenges at Warwick and the planned outage at Trentwood in which we incurred incremental cost in the aggregate, totaling approximately $24 million for the quarter. We believe these issues at our Warwick operation, which have caused significant disruptions during most of the year, are now resolved. More on this topic in a moment. With the actions taken and major work now complete, we believe Warwick, Trentwood, and our other facilities are well positioned to operate at a more normalized run rate for the balance of the year in what remains a very challenging environment. As previously announced, in early July, we declared force majeure at our Warwick rolling mill due to the abrupt cessation of magnesium deliveries from USMAG. However, the force majeure was lifted in early September after we successfully secured and qualified magnesium from additional alternative sources. At this point, we have secured all our magnesium requirements through 2023. and are in the process of finalizing agreements for 2024 and beyond. As a result, we believe our supply base is well diversified, and we are no longer reliant on a single supplier or geographical region. Litigation with USMAG continues, but USMAG is no longer a factor in our magnesium supply base moving forward. At the time we declared force majeure, we anticipated production and shipments of certain beverage and food packaging products could be reduced by 40 to 50 percent of previously expected shipments in the third quarter. Our actual shipments were better than expected, and with the security of our magnesium supply and boric's capacity now fully restored, will work with our customers to return to more normalized production through the remainder of the year. Work with Alcoa continued during the quarter to improve the smelter's performance, which negatively impacted the efficiencies and financial performance of the Warwick rolling mill for several quarters. These issues have now been addressed and Alcoa's performance and quality have improved back to acceptable levels. As noted in our second quarter earnings call, we continue to qualify additional molten metal sources to further diversify our metal supply going forward and mitigate the risk of any further operational disruptions. Longer term, We intend to increase the use of recycled materials as a percentage of our raw materials as we continue to migrate towards more sustainable raw material and power supplies at Warren. During the quarter, we completed a long-planned major outage at our Trentwood rolling mill. There was significant work completed on our large stretcher the cast house, and other areas within the mill with minimal disruption to our customers. Trentwood is well positioned for a strong finish to the year as we focus on satisfying and improving aerospace market and meeting continued strong demand for general engineering plate. I want to congratulate the team there for the tremendous effort put forth to complete this body of work and prepare our operations for continued growth moving forward. We also continue to make good progress on our rollcoat capacity expansion project for beverage and food can applications at our Warrick facility. With the equipment on order, we are focused on readying the site for installation and startup of the new rollcoat line to begin in late 2023 for early 2024 with production to be fully operational mid to late 2024. In summary, I'm pleased with the progress we have made to restore our operations to more normalized levels following the significant headwinds we experienced during the third quarter. We have a strong and diversified portfolio, and demand has remained solid for the vast majority of the end markets we serve, which we expect to continue for the balance of the year. While continued high inflationary conditions remain and are having an adverse impact on cost and efficiencies within our operations, our teams are focused on offsetting these higher costs and inefficiencies through cost reduction efforts, efficiency improvements, and continued commercial actions to improve our margins, demonstrating the flexible nature of our cost structure. I am confident our solid market position, strong customer relationships, and multi-year contracts with strategic partners will continue to support the long-term profitable growth for Kaiser. I'll now turn the call over to Neil for more detail on the quarter. Neil?
spk04: Thank you, Keith. Good morning, everyone. Turning to slide eight, value-added revenue for the third quarter 2022 of $356 million increased $50 million, or 16%, compared to the prior year period, predominantly reflecting improved pricing across our end markets to mitigate the impact of inflationary costs. Our Arrow high-strength business value-added revenue increased $4 million, or 5% year-over-year, on 10% lower shipments, reflecting a higher mix of high-value products while shipments reflect the impact of the planned outage at our Trentwood facility. Packaging value-added revenue improved year-over-year by $21 million, or 17%, on 15% lower shipments, reflecting the commodity surcharges in higher pricing, while lower shipments reflect the impact that a force majeure declared in July for our packaging products. General engineering products improved $19 million, or 26% year over year, reflecting higher pricing on 8% lower shipments, which was driven by softness and demand for extruded rod and bar products shipped to service centers. Auto bar continued to improve $5 million, or 25%, on 23 percent increase in shipments. Value-added revenue of $1.1 billion for the first nine months of 2022 increased $307 million, or 39 percent, compared to the first nine months of 2021. Barrel high-strength value-added revenue increased $45 million year-over-year on an 11 percent improvement in shipments, reflecting higher pricing, and continual improvement on underlying commercial aerospace demand. Packaging value-add revenue for the first nine months of 2022 was $447 million, or $189 million higher, reflecting a full nine months of the work acquisition, commodity surcharges, and higher pricing. General engineering value-add revenue improved year-over-year by $69 million, primarily driven by higher pricing with continued strong demand, while added value added revenue for automotive applications increased $3 million, relatively flat as compared to the prior year first nine months, reflecting the ongoing semiconductor and other automotive supply chain disruptions. Additional detail on value added revenue and shipments by end market applications can be found in the appendix of the presentation. Turning to slide nine, adjusted EBITDA for the third quarter 2022 decreased $19 million compared to the prior year quarter. Reflected in the current quarter are $24 million of higher costs and inefficiencies due to the force majeure declared at our packaging operation in July and the planned outage at our Trentwood facility. In addition, we are continuing to be affected by higher inflationary driven costs which we are aggressively moving to offset with cost reduction efforts, efficiency improvement projects, and pricing actions. Our third quarter 2022 EBITDA margin of 8.8% declined from 16.5% in the prior year period, reflecting the impact of the noted inefficiencies in higher costs. Adjusted EBITDA for the first nine months of 2022 was $128 million, a decrease of $19 million, as compared to the first nine months of 2021. The decrease reflects the higher value-added revenue, as discussed, offset by higher major maintenance, manufacturing, energy, and employee-related costs, as well as the $54 million of supply chain disruptions and incremental freight costs we have discussed in this and previous quarters, which have now been addressed, as noted by Keith. Moving on to slide 10, reported operating income for the third quarter of 2022 was $3 million. Adjusting for $3 million of non-run rate charges, adjusted operating income was $6 million, down 78% from $26 million in the prior year third quarter, primarily due to the decrease in EBITDA as previously discussed. In addition, Operating income includes $1 million of incremental depreciation and amortization expense. Chart reported net income for the third quarter of 2022 was $3 million compared to a reported net loss of $2 million in a prior year quarter. Adjusting for non-run rate items, noted above, adjusted net income for the third quarter of 2022 was $10 million compared to adjusted net income of $9 million in a prior year quarter. The third quarter of 2022 also reflected a $13 million of pre-tax other income, primarily related to a sale of a non-strategic legacy land asset. For the third quarter of 2022, we recorded a tax expense of $1 million, reflecting the impact of the required tax adjustments. For the full year of 2022, we now expect our effective tax rate to be in the low to mid single digits. And over the long term, We continue to believe our annual effective tax rate before discrete items will be in a low to mid-20% range. We anticipate that our cash taxes will remain in low to mid single digits until we consume our federal NOLs, which as of year end 2021 were $187 million. As reported, income per diluted share was 16 cents in the third quarter of 22, compared to a loss per diluted share of 14 cents in a prior year quarter. Adjusting for non-run rate items, adjusted income for diluted share was $0.60 for the third quarter of 2022 compared to an adjusted income for diluted share of $0.57 in the third quarter of 2021. As of September 30th, cash of approximately $129 million and more than $555 million of borrowing availability in our revolving credit facility provide total liquidity of approximately $684 million. There were no borrowings underneath the revolving credit facility during the quarter, and the facility remains undrawn. For the first nine months of 2022, our $128 million of EBITDA and available cash funded $141 million of working capital usage, predominantly related to inventory bills, $82 million of capital, $34 million of interest, $38 million of dividends paid to our shareholders, and $5 million of cash tax. We expect working capital to be a source of funds over the next few quarters as the business adjusts to a more normalized operating environment. We have lowered our planned capital spending for the full year 2022 to $165 million to $175 million due to the supply chain challenges and the timing of payments on certain projects. And now I'll turn a call back over to Keith to discuss our fourth quarter 2022 and beyond business outlook. Keith. All right. Thanks, Neil.
spk05: And now for our outlook for the balance of the year. Turning to slide 12. We expect a solid fourth quarter in aero and high-strength shipments to end the year as the momentum continues in commercial aerospace towards full recovery from the pandemic. Rate increases for single aisles have either been announced or are being planned in 2023 as supply chains improve, airline passenger miles increase, and declarations by the air framers support a stronger upcoming year. Business jet production is strong, yet not fully reflective of real demand due to limitations set by ongoing supply chain issues. Even so, There is a strong backlog for business jets, with production increases set to grow each year over the next several years. Defense is expected to remain strong, led by increasing demand for the F-35 and the other legacy platforms we support. We remain well positioned to continue to support these programs. Our Trentwood Mill and our other facilities, which service the aerospace and high-strength end markets, are positioned well to capitalize on the strong demand expected in the fourth quarter and beyond. Turning to slide 13, with the resolution of our magnesium and molten metal supply chain issues at our Warwick Rolling Mill in early September, and the return to a more normalized operating environment, we expect to see shipments continue to improve in the fourth quarter. Our capacity for 2023 is fully committed, and our long-term outlook remains intact. As discussed earlier, our investment for a new roll-coat line is on track and expected to be fully operational in 2024. Discussions with customers for continued supply through the balance of the decade continue, and we remain encouraged with our long-term outlook for profitable growth in packaging at Warren. Now turning to General Industrial and slide 14. During our second quarter earnings call, We noted inventory levels for extruded rod and bar products at service centers were slightly elevated over recent previous periods, suggesting supply was catching up to the strong demand we've experienced over the previous 18 to 24 months. During the third quarter, inventories have appeared to flatten out and slightly decline from last quarter's higher levels. But we believe this is more a factor of lower demand and resulting lower shipments from the mills to service centers in soft alloy extruded long products. We now expect that softening in long products will continue into the fourth quarter due to typical seasonality and inventories becoming more in balance with current demand. However, we are not experiencing the same market dynamics with general engineering plate Demand remains very strong, and we anticipate strong shipments of general engineering plate will continue well into 2023. Global factors continue to limit availability of these products from the typical importing mills into the North American market, allowing us to maximize our opportunities. And with the Trentwood outage behind us, we are well positioned to serve these customers in the fourth quarter and beyond. Turning to slide 15, automotive continues its slow recovery due to various supply chain shortages. And at this point, we don't expect any meaningful recovery until 2023. Now turning to slide 16. Given the current outlook for our markets and our expected mix of shipments, along with continued strong inflationary pressures and an expected higher incremental spend of approximately $5 million in major maintenance in the fourth quarter, we expect our fourth quarter EBITDA and margins to improve to levels similar to the results we delivered in the first half of this year, now that our major supply chain issues have largely been resolved. And in summary, turning to slide 18, over the longer term, our strategy remains intact, and we continue to believe we are well positioned to deliver value-added revenue of approximately $2 billion and an EBITDA margin in the mid to high 20% range, the timing of which remains subject to expected investments and macroeconomic conditions. With that, I will now open the call to any questions you may have. Vanessa.
spk02: And thank you. We will now begin our question and answer session. If you have a question, please press 0 then 1 on your touchtone phone. If you wish to be removed from the queue, please press 0, then 2. If you're using a speakerphone, please pick up the handset first before pressing the numbers. Once again, if you have a question, please press 0, then 1. Our first question comes from Josh Sullivan with The Benchmark Company.
spk03: Hey, good afternoon. Hey, Josh. Just within the aerospace outlook, you've got Boeing and Airbus experiencing some supply chain issues on the engine side. What are you seeing as far as impact to the aerospace plate side for airframes? Or maybe how has your commercial airframe demand outlook evolved over the last nine months?
spk05: Well, during the low point, Josh, so our high point was actually the end of the first quarter in 2020. And during the period, I think, when the depths of the pandemic, our aerospace and high-strength shipments fell to about 40% below that high level. And actually, if you look at a full year, 2019 is actually the market there. So we've recovered back. We think we'll be down around 30%. So we're recovering and moving back. but we feel we're still on track for that 2023, late 2023, 2024 recovery period. That's really hinging on the recovery on commercial air, you know, the big airframes. Now, in discussions with all of our major airframe customers there, we're continuing to be encouraged with the demand for plate. Now, they're taking into account all the shortages that they're dealing with, but we believe we're still on track. And from our position, especially with Trentwood and the other facilities we have, the contracts are in place, you know, and as long as the demand and recovery continues and there's no other major surprises on supply chain issues, we think we're on that track for recovery and look for more improvement next year on that road to recovery.
spk03: And then maybe sticking with high strength, what are you seeing as far as semiconductor capital equipment demand? How much of your exposure is currently outside of North America? And then are you seeing any early indications of demand from some of these large domestic capacity projects that are coming online?
spk05: Yeah, so there's a few big suppliers. You can point out like LAM and Applied Materials and others. And they basically, on the products that we provide, which provide chip-making tooling for the end users, they're really all global. So we have a lot in Asia. There's a lot in the U.S. There's actually production for Europe. I think the production for Europe, especially for the U.S., are fairly strong and relatively secure. There's certainly some question on what the recent Biden announcement would be regarding chip production in China. And I think a lot of our end customers are working through that. So there could be some silencing of demand based on that edict from the government, but that's a wait and see. But for now, we have very strong demand. We've had continued strong demand expected for 2023, and we'll go from there.
spk03: Got it. And then just one last one. What's your exposure to any potential ban on Russian aluminum imports?
spk05: You know, Josh, we don't buy anything from Russia. So, you know, what now? Just because we don't doesn't mean that the market isn't insulated. I can speak for Kaiser. We have diversity in not only mag supply, but also metal supply in our purity supply. and other alloys, you know, the lesson that we've had to learn from our experiences on MAG really made us focus and ensure that that diversity, not only of suppliers, but regionality is very well diversified. So, it could have some up and down spikes in the pricing, but as you know, in the Kaiser model, we passed that through. So I really don't impact, expect any of that impact on us. And I feel very, very good about our diversity of supply base for any of these materials. So whether it's, whether it's something in Russia, whether it's something that happens in China, you know, we're trying our best to insulate ourselves from all these global macro conditions.
spk03: Great. Thanks for the time and congratulations on the core.
spk02: Yeah. Thank you, Josh. Thank you. As a reminder, to enter the queue, you can dial 0, then 1. We have our next question from Emily Chang with Goldman Sachs.
spk01: Good afternoon, Keith and Neelan. Thanks for taking my question. My first one is just around the margin outlook there. It looks like from your commentary, you're looking at somewhere in the low teens EBITDA margin on VAR in the fourth quarter. But perhaps as we look ahead into 2023, Could you perhaps outline what the biggest driver you need to see for margins to improve close towards the low to mid-20% range? Is that aerospace volumes? Is it commercial improvements offsetting cost inflationary pressures? What else should we be thinking about here?
spk05: Well, we'll spend a lot of time on 2023 in February, Emily, but as I really think through your question, which is something we're actually addressing every day. So we've we've put these major disruptions behind us. And that's really impacted. Matter of fact, you know, if you just reflect on where Kaiser would be today, Neil called out the $54 million of incremental costs that we incurred this year. Just on the business situation that we have today and on volumes, if we had that $54 million back, we would be at roughly a 17% margin on this business. So, I'm encouraged about our ability to move pricing through. You can see that in every market, even in ones where we have long-term contracts, we've been able to move prices through to the marketplace. The one area that we've really, and I believe that will continue, as long as we don't have a significant change in the market dynamics, but what we're anticipating right now, we believe that that will continue to be available to us. The challenge we have and what we're focusing on is stabilizing our operations. We want to get back to where the plants are running without these big, large disruptions. They can start to recover on the efficiencies that all these disruptions have caused. And once we do that, we'll get back into our normal cadence. As we get back into normal cadence, we're going to have cost improve. over most definitely where we are in 2022. And then as that continues and we see the recovery in aerospace, we expect improved pricing and packaging. We expect the general engineering business to still be robust. We believe that mix of products and the ability to bring those costs back in line are going to move us back to those more traditional margins which we've experienced. And then the major push will come once we get the new roll code line in place and we really execute that strategy of Warwick to move to a much higher margin type output of product. And we get the markets defined, as we've discussed, and aerospace back to the levels we saw in 2019. That's when we think we're really going to be able to execute to these levels that we believe our businesses can deliver.
spk01: Great, that makes a lot of sense. My follow-up is just around the 3Q value-added revenue per pound levels across your different end markets there. It looks like for aero packaging and general engineering, these are pretty meaningfully quarter over quarter. Would that be a good level to use going forward as we think about the look forward, or is there some sort of mix there? change there that drove some of the quarter over quarter uplift?
spk05: Well, it's a good recognition there, Emily. We are up in price across the board. You know, I looked at these numbers, for instance, Q3 versus the second half of last year. And remember, we've been playing catch up with these costs and passing through costs. So shipments, and mainly due to the force majeure issue, we were down about 13 percent in Q3 versus the second half of last year. But our value-added revenue is up 15 percent. Okay? So, what we have been successful in doing is not only passing through costs and moving back prices in the right direction, we've also been very successful in passing this commodity surcharge prices through. So, if you recall, When we brought in Warwick into the portfolio, Warwick had a lot of these contracts in place in which we could have annual recoup and reset of costs and certain pass-through components of the business. What we've been successful in doing is moving those to a quarterly basis on resetting those costs. Not for all, okay, but we have been successful in improving getting those costs recovered in a much timelier timeframe with all the customers there. So, there have been a lot of actions that have taken place, and you start to see it in the bar per pound. And so, not all of that is just a mix. There is some mix associated with that. But there is a certain amount of pass-through on the commodity prices, those costs that we've incurred.
spk04: Just one note, Emily. In the third quarter for aero high strength, if you're looking at that commodity, VAR per pound, that is a little bit of a mix in there because of Trentwood being this planned outage. Aerospace plate was down, but our other higher valued extruded products were a bigger piece of the mix. So that drills a little bit of that VAR per pound.
spk01: Okay, now that's really helpful, Carla. Maybe just a quick follow-up there then. Outside of that mixed component in arrow and high strength, would it be fair to say that a lot of the sequential quarterly change in value-added revenue per pound is really just the surcharge rather than maybe sort of demand-related price increases that you've been able to push through?
spk05: Well, they'll certainly continue. Emily, so I wouldn't expect a dip because now we put those fundamentally in place with our customers. So those should continue. Now, it's a little tough to differentiate between those costs and how much margin just through pricing on conversion price increase. But we're certainly focused in that area as well. So as we turn over new contracts in aerospace, as we move through. We're certainly looking at increased prices that will take place, and there will be some margin expansion just on conversion price increase as we go through into new contracts. And we can state that for aero, you can state that for automotive, you can state that for packaging. And while GE is more transactional, we're certainly pushing through prices quicker there, and there is some margin expansion based on price improvements on our conversions. So we're very mindful of moving that through as well.
spk01: Great. That's really helpful. Thanks, Keith and Neil.
spk04: Thanks, Emily. Thanks, Emily.
spk02: And thank you. I see no further questions in queue.
spk05: Okay. So thanks, everyone, for being with us today. I look forward to updating you on our fourth quarter and full year results next February. Thank you very much.
spk02: And thank you, ladies and gentlemen. This concludes our conference. We thank you for participating. You may now disconnect.
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