Kaiser Aluminum Corporation Q4 FY2025 earnings call

• Fourth quarter results build on momentum, marking fifth consecutive quarter ahead of internal expectations and exceeding full year outlook. Start-up costs moderated, metal pricing was a tailwind. Delivered over 25% EBITDA growth in 2025 with margins above 21% and second half margins near 24% due to packaging investment and operational progress. - Shipments and conversion revenue details by end market: Aerospace and high-strength down due to commercial aerospace OEM destocking and Phase 7 investment; Packaging up due to transition to coated products; General engineering up due to tariff-driven reshoring and KaiserSelect quality; Automotive up with improved pricing and mix offsetting lower shipments. - Balance sheet and cash flow: Strong liquidity position, net debt leverage ratio improved, capital expenditures in 2025 were $137 million, 2026 capital expenditures expected $120 - $130 million, free cash flow $120 - $140 million expected, and dividend payments made with new dividend declared.

Full year total net sales were $3.4 billion. Conversion revenue for the year was $1.5 billion. Aerospace and high-strength conversion revenue totaled $457 million (down $73 million or ~14%). Packaging conversion revenue totaled $544 million (up $54 million or ~11%). General engineering conversion revenue totaled $331 million (up $14 million or ~4%). Automotive conversion revenue totaled $122 million (up 2%). Reported operating income for 2025 was $189 million. Adjusted operating income was $188 million (up $63 million from 2024). Reported net income from 2025 was $113 million or $6.77 per diluted share. Adjusted net income was $100 million or $6.03 per diluted share. Adjusted EBITDA for the year was $310 million (up ~$69 million from 2024). Adjusted EBITDA as a percentage of conversion revenue was 21.3% (470 basis points above 2024's 16.6%).

• 2026 outlook: Expect record years for conversion revenue and EBITDA. Aerospace shipments 10% - 15% increase, conversion revenue ~5% - 10% up. Packaging shipment growth 5% - 10%, conversion revenue growth 15% - 20%. General engineering shipments and conversion revenue ~3% - 5% growth. Automotive shipments and conversion revenue ~5% - 10% decline primarily due to planned outages. Capital expenditures for 2026 expected $120 - $130 million, free cash flow $120 - $140 million subject to metal price movement.

Q: Really nice results for the year. My first question is on the 2026 outlook at a higher level. So I think it looks like the aerospace conversion revenues below shipments, while packaging conversion revenues above shipments. Is there anything to call out on mix. If you think about Aero, for example, commercial business jet or defense, or is this more just more high strength in non-aero. And then on packaging, similar to, is this a pricing statement or a mix towards more coated products? Just any sort of color for the difference between the shipments and conversion revenue outlooks.

A: Sure. Bill. Let me hit Aero first. We called out some specifics because, as you recall, we had an outage at Trentwood mainly through the third quarter. So if you looked at the 2 halves of the year, our shipments in the second half were actually down 25% from the first half of the year. That was mainly plate-related. And you saw a pretty higher number there because extrusions generally carry a higher price than the plate. We expect to come back rapidly on the plate in this year. So that -- the numbers we're reflecting there says we're back to having that full plate capacity -- and so you'll see that in the numbers. The prices have remained very strong and consistent. Of course, the majority of that is backed up by long-term agreements in place. And so as we've noted, as the industry continues to improve, continue to get improved shipments output by our customers, we should see those numbers pop up. From a mix perspective, what you will also see out of our flat roll shipments, Bill, we're starting to see activity again on the semiconductor side. So as you know, we put that capacity in that can service both aero and general engineering. I'm really encouraged by the activity at the beginning of the year on semiconductor. So I think after maybe a 2-year hiatus there, we're going to start to see some good activity through the balance of the year that should really support that increased capacity at Trentwood. As I move over to the packaging side and look at our business, I really think we're positioned for a very strong year. The -- we're in our seventh month of increasing output from our roll code for the new investment that we made. So we're beginning to see the better through throughput that was expected. We're beginning to get all the qualifications behind us. We're ramping up speeds. And so the opportunities there continue to exist, quite frankly, beyond what we have. We are working with some of our converters to try to get their performance up improved as I think the opportunities there exceed even all of our capacities there together. So as we also mentioned in our notes, we're really pleased to complete the final contract, multiyear contractual opportunity for the new capacity. So what you're going to begin seeing and what you have seen is that the mix shift has begun in earnest, you'll start seeing some improved pricing on that side as a result of those investments and the contractual commitments that were made. And so we're really positioned there. We talked about bringing that an additional 300 to 400 basis points impact on the total company. We're beginning to already see that, and they were a major influence into what happened for us even at the end of the year. So a lot of expectations for that for 2026. Food market, the food packaging side is very strong. It's even stronger than beverage. And as you know, we're a major player there. So we see full output. The surprise to me, and I'll just continue if I can. The surprise to me is the automotive opportunity that we highlighted in our comments with the move back toward the internal combustion engines, man, we're seeing demand on trucks and SUVs. So we made a decision to make an investment that we really hadn't contemplated in the last 12 months, but we'll be making that decision to increase our capacity through some of our highly specialty products and that all services trucks and SUVs. So that's going to be a unexpected focus for continued growth for us in that category.

Q: Can I pick up on that last point. This auto opportunity it sounds like it's capacity expansion, but if not, I'm just trying to get a sense, we'll just take away from other markets, how much capacity growth does this imply when will this -- I guess, when would we be ready to sort of support this effort? And maybe taking a step back some more to my question on the guidance. You're looking for this year to be down following a pretty rich, I guess, mix last year. Anything to call out from the market environment or platforms that you're on or things like that within the 2026 guidance?

A: Yes. No. The only difference, we don't expect any price deterioration there in any of the markets, Bill. The only change that was going to be highlighted probably on the aero side was a slight adjustment as you bring back more plate as opposed to extrusion on the era. On the automotive piece that I was just referring to, we're actually -- these are actually fairly high-margin products for us. They're all specialty products. They are actually products that Kaiser has 10 or close to 100% supply position. And as the markets turn back to stronger growth on planned on trucks, especially around ICE vehicles. We're the only play. So there's going to be an outage at a couple of outages that we'll take through the year to prepare for that. So you may be -- actually, that may impact some of the shipments this year. but certainly preparing us for 2027 strength, continued strength, and we see these as multiyear. We don't think that the change, the shift that's gone to is just a single year temporary slope. We see this focus on ICE vehicles for trucks to be multiyear. That's what our customers are telling us. So我们're going to ramp up the investment. And I would expect to see -- we'll highlight it more in April. But our automotive component here on very specialized products has the opportunity to increase substantially within the next 12 to 18 months.

Q: Okay. Maybe pick it up again on this. So CapEx guidance looks to be a little higher than expected. Is a lot of this driven by this auto opportunity? Or maybe you could parse out the CapEx guide maybe in the context, I guess, Phase 7, I think, came a bit under budget. Just any sort of context on the CapEx guidance?

A: Yes. Actually, we were expecting to be probably somewhere between $10 million, $12 million this year. And that change in range for us is purely that automotive opportunity. Our customers would take it today. They're actually utilizing some steel products because they don't have the availability of the aluminum products in the quantities that they need. So we've updated that opportunity, and that's the reason that's probably a slightly higher CapEx than你may have expected.

Q: Great. Maybe just my last one. Obviously, you mentioned earlier that you're not expecting any changes, I guess, to sort of Midwest premiums and things like that. I assume that also may be similar around where scrap spreads are. But given the high prices that were -- or cost, I guess, for your customers given where aluminum pricing is today, are you hearing any evidence of demand destruction or what areas would you be concerned with? And then maybe secondarily, we're hearing more about derivative tariffs any potential impact to your business? I realize it's early days on that second point.

A: Yes. No, it's fascinating what's going on. I can tell you this, Bill, this is a way to look at '25 and '26 for Kaiser. No question, we had some significant tailwinds. We had some significant higher operating costs as we put in these capacities. We don't expect those to extend into 2026. So you're going to see a recovery on those costs that were out in '26 versus -- excuse me, '25 versus '26. Our outlook also has the expectation that you won't necessarily -- you won't see that tailwind reoccur in 2026. Now it may we're still seeing favorable higher prices than expected in Q1. But our outlook did not assume that to continue throughout the year. And so that gain that we're talking about here is purely operational gain based on the investments we've made, the cost and the efficiency gains we expect to make in our operations. So any continued higher price tailwinds are going to be a tailwind above what we're talking about on this call. So it could conceivably go higher than what we -- that's why we gave the initial outlook the way we did. I have to tell you, as you ask the question and I look at it constantly, Bill. We've seen absolutely no demand destruction in any of our product lines. We're seeing the general market, the general business start out very strong. We see continued bookings shipments going through the months. I'm more encouraged than I had been on the general engineering with GDP. So I'm feeling better about that side of our business. Our packaging business, as I talked about, we can sell every pound we can make Food business is up to the high single digits year-over-year growth. And then when I look at what's going on, I know the market corrected felt like while this 232 tariffs were going to fall off. All indications that we're getting are that what they're considering is more downstream type products and not removing the tariffs, but perhaps loosening tariffs but addressing the full end product versus just the raw material. And at this point, we really don't see those tariffs coming off. And even if we did, we've commented, we're neutral to positive, slightly positive there. And we've said all along, while we appreciate and enjoy the tariffs -- excuse me, some of the tailwinds we get from metal pricing we should stay at any point if we saw a rapid decline, those could turn into headwinds. And so we'll call those out, and that's why we remain super uber focused on operational gains in our business, which we've highlighted here in our comments this morning.