KAISER ALUMINUM CORP Q1 FY2025 earnings call

• Keith Harvey noted a strong start to 2025 despite trade volatility, with end markets tracking as expected and full year outlook improved. - Key investments include the fourth coating line at Warrick rolling mill in commissioning and Trentwood Phase VII investment progressing. - Neal West discussed inventory valuation change to weighted-average cost, re-casted results, and detailed segment revenues/shipments. - Strong balance sheet with $577 million liquidity, net-debt leverage improved, capital expenditures projected, and dividend declared.

Conversion revenue for the first quarter was $363 million, a decrease of approximately $4 million or 1% compared to the prior year period. Aerospace and High Strength conversion revenue totaled $121 million, down $16 million or approximately 12%, with a 10% decline in shipments but strong demand in business jet, defense, and space. Packaging conversion revenue was $127 million, up $9 million or approximately 8% y-o-y on an improved mix of higher value added products, but shipments declined 9% due to a pivot to coated material. General engineering conversion revenue was $84 million, up $3 million or 4% y-o-y on a 12% increase in shipments, driven by favorable trade policy. 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.

• Project 5%-10% growth in conversion revenue for 2025. - Raised full year 2025 EBITDA expectations 5%-10% above re-casted 2024 adjusted EBITDA of $241 million. - New investments expected to drive EBITDA and margin improvement, with deleveraging continuing.

• Trade policy volatility could impact supply chain and market demand. - Inventory valuation changes and metal price fluctuations could affect financial results.

Q: 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?

A: 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.

Q: Okay. 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?

A: 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.

Q: 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?

A: 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你 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.

Q: 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?

A: 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.