Kaiser Aluminum Corporation
Q1 2021 Earnings Call Transcript

Published: 1 May 2021

[Operator:]

Welcome to the First Quarter 2021 Earnings Conference 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. I will now turn the call over to Melinda Ellsworth.

[Melinda Ellsworth:]

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's first quarter 2021 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.

[Keith Harvey:]

Thanks, Melinda, and welcome everyone to Kaiser Aluminum's first quarter 2021 earnings call. The Kaiser team delivered another strong quarter as pandemic-related conditions impacting our markets began to normalize. All our major end markets continued to improve sequentially from second half 2020 results through the first quarter in 2021. We also reached a significant milestone in the evolution of the company on March 31 by successfully completing the acquisition of the Warrick Rolling Mill in Evansville, Indiana from Alcoa, adding the attractive growing aluminum packaging end market to our portfolio of served markets.

[Neal West:]

Thanks, Keith, and good morning, everyone. Turning to Slide 8, value-added revenue for the first quarter of 2021 of $172 million increased $19 million or 12% compared to the second half 2020 run rate, demonstrating improvements in each of our end markets, driven by continued strength in demand for our general engineering, automotive, and defense applications. Adjusted EBITDA of $38 million increased $8 million compared to the second half 2020 run rate, reflecting higher value-added revenue and a cost structure more fully aligned with volume as we aggressively flex costs in operations during 2020. For the first quarter of 2021, we reported a solid 21.8% BITDA margin, reflecting strong operating leverage on increasing volumes. Comparing our strong first quarter 2020 results to the first quarter of 2021, value-added revenue declined by $45 million or 21%, reflecting the COVID-19-related impact in commercial aerospace demand mitigated in part by the continued strength in demand for our defense-related applications and stronger year-over-year demand for our general engineering and automotive applications. Adjusted EBITDA for the first quarter of 2021 declined $22 million compared to the prior-year quarter, reflecting the negative sales impact of approximately $26 million, partially offset by lower manufacturing and corporate overhead costs. First quarter 2021 EBITDA margin of 21.8% was down from the record 27.4% EBITDA margin in the prior-year quarter, reflecting the lower volume in operating cost. Turning to Slide 9, aerospace high-strength value-added revenue for the first quarter 2021 of $71 million improved slightly, increasing $2 million or 3% on a 23% increase in shipments compared to the second half run rate, which as a reminder, included approximately $15 million of additional revenue recognized in the third quarter of 2020, related to modifications to customer declarations under multiyear contracts. The increase in value-added revenue in shipments reflects continued strength in demand for our defense-related application and improving demand for business jets, as commercial aerospace demand while stabilizing, remains weak. Compared to our record first quarter 2020, aerospace high-strength value-added revenue for the first quarter of 2021 declined $59 million or 46% on a similar percentage decline in shipments reflecting the COVID-19 impact and our commercial space demand, which again was partially offset by continued strength in demand for our defense-related applications.

[Keith Harvey:]

Thanks, Neal. I'd like to now focus on our recent acquisition of the Warrick rolling mill and outline our priorities as we begin the integration of Warrick into Kaiser. As we stated when we announced the purchase in late November 2020, the Warrick facility has been well-maintained and is operated by a deeply talented and experienced management team and workforce. Warrick's reputation as a quality and strategic supplier to its North American customer base is solid and well-established. For decades, the Warrick rolling mill has served the North America packaging market with a unique and substantial capability in coated and bare products for beverage and food packaging applications. We expect to continue serving these markets with the intent to meet the growing needs of our customers and further differentiate Warrick as the premier supplier in the markets we serve. Here's how we intend to achieve this. First, we are working with the Warrick team and Alcoa to fully transition the rolling mill and support services to Kaiser. We have established a detailed plan to transition back office services, previously delivered by Alcoa to Kaiser over the next six to 12 months. As we work toward completion of transitioning these services, our goal is to ensure the rolling mills' focus remains on servicing our customers at the highest level of customer satisfaction with regards to quality and delivery, as we know market demand is high and they are counting on us to meeting our commitments.

[Operator:]

Thank you. And we have our first question from Josh Sullivan with Benchmark Company. Please go ahead, sir.

[Josh Sullivan:]

Good afternoon.

[Keith Harvey:]

Hi, Josh.

[Josh Sullivan:]

Can you just talk about – now that Warrick's closed, what do the contract structures for can look like? Are they multiyear? Are we coming up on any renegotiations where the market is getting a little tighter?

[Keith Harvey:]

Sure. What we found is that most of these are multiyear contracts that are in place. During the diligent process and as we have closed on Warrick, we've actually been in the middle and have completed some contract renewals and some extensions in place. We still have some outstanding that will be renewed over the next couple of years. And as we discussed, Josh, we're also – as we go through the strategic planning review, we'll be looking to what form and what type of length of period of contracts we'll have going forward. So there's a lot of activity currently and expected in the near future on contract renewal and extensions.

[Josh Sullivan:]

Got it. And then it sounds like you guys are still going through where the capital investments might go into Warrick. But what about the existing $80 million or so if aerospace has still got a – it seems like there's a lot of capacity there. Where is the current CapEx kind of going into?

[Keith Harvey:]

Sure. So if you look at the existing businesses we have and it remains true, typically, we've said the sustaining CapEx and/or growth projects are roughly 75% of depreciation for the business. And then when you really – when you roll in the Warrick, we're looking at an additional roughly $20 million, $25 million of sustaining CapEx and some growth projects that they have already identified and we're funding.

[Josh Sullivan:]

And then just going to the semiconductor demand in industrial, there's obviously some large CapEx announcements out of the semiconductor manufacturers. How long of a cycle do you think that demand for Kaiser's plate will last with regards to that semiconductor buildup?

[Keith Harvey:]

It's sometimes tough to predict how long these last, Josh. But I can tell you we're in our second year in this go-around of extremely strong demand. As you see, as more and more things require chips and we too are excited about the recent announcements for domestic manufacturing being supported here in North America, we think that demand is – while it may still not lose some of its cyclicality, that demand keeps going up, and we're well-suited. The Kaiser Select plate we supply there is a preferred product, and we're well-positioned with our service center customers and with the OEMs in supplying that. So we think that's a long-term good growth potential for us.

[Josh Sullivan:]

Got it. Thank you. I'll jump back in the queue.

[Keith Harvey:]

Thanks, Josh.

[Operator:]

And thank you. We have no further questions in queue. I will now turn the call over to Keith Harvey for closing remarks.

[Keith Harvey:]

Okay. Thank you for your time and interest in Kaiser Aluminum. And I look forward to updating you on our second quarter results and our outlook and plans for the balance of 2021 during our second quarter earnings call in July. Thank you very much. Have a good day.

[Operator:]

Thank you. Ladies and gentlemen, this concludes today’s conference. Thank you for participating, you may now disconnect.