Kaiser Aluminum Corp (KALU) Q4 2020 Earnings Call Transcript

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Kaiser Aluminum Corp (KALU -2.16%)
Q4 2020 Earnings Call
Feb 25, 2021, 1:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Welcome to the Fourth Quarter 2020 Earnings Conference Call. My name is John, I'll be your operator for today's call. [Operator Instructions]

And I will now turn the call over to Melinda Ellsworth.

Melinda C. Ellsworth -- Vice President of Investor Relations and Corporate Communications

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's fourth quarter and full year 2020 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; Senior Vice President and Chief Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey.

Before we begin, I would 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, 2020. 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 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 have 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?

Keith A. Harvey -- President and Chief Executive Officer

Thanks, Melinda. And welcome, everyone to Kaiser Aluminum's fourth quarter and full year 2020 earnings call. Our fourth quarter and second half results were slightly more favorable to the outlook we had previously provided due to strength in the automotive and general industrial business in the quarter. We delivered strong performance under severe business conditions as we navigated the significant decline in commercial aerospace demand during the back half of the year while managing strong demand for our general engineering, automotive, and defense products.

For the full year 2020, value-added revenue of $697 million was down approximately 19% compared to our 2019 results, reflecting a strong first quarter followed by significant COVID-19 related disruptions to our operations and end markets during the remainder of the year. Despite the significant decline in value-added revenue, we reported full year adjusted EBITDA of $154 million and EBITDA margin at a solid 22% in an extremely challenging environment.

Our results reflect solid execution of our business cycle strategy and our ability to quickly flex costs and operating levels as we responded to rapidly changing business conditions throughout the year. Aero and high-strength demand experienced the most significant decline year-over-year, reflecting the global pandemic's impact on commercial airline travel. Delays in recertification of the Boeing 737 MAX and destocking within the supply chain.

Value-added revenue for our aero and high-strength applications for the full year 2020 was down 28% compared to a record 2019 reflecting record performance in the first quarter and strong contractual commitments that carried us through the remainder of the year. While commercial aerospace demand fell sharply in the second half, we continue to see strong demand for our products in the defense industry, specifically from the Joint Strike Fighter program and other legacy military aircraft programs throughout the year.

Automotive extrusion demand remained strong following temporary COVID-19 related supply chain shutdowns in the second quarter. Planned program launches for multiple new platforms ramped up during the second half. New programs were awarded and overall demand improved as North American vehicle build rates increased to 13 million vehicles from 12.3 million vehicles as the industry had previously forecast. Value-added revenue for our general engineered products reflected steady underlying demand driven in part by strength in semiconductor and automotive applications, strong customer preference for our KaiserSelect plate, and restocking in the supply chain. Pricing remained stable.

At Kaiser as with many other companies that successfully navigated the year in an extremely challenging environment, we have much of our success to our people and the way they followed our playbook and executed on our strategy. There were a number of accomplishments I'd like to share. First and foremost, we operated our business safely, not only did our organization quickly moved to mitigate the spread of COVID-19 in our facilities, we did so by executing with record safety performance for the entire year. It's a significant accomplishment and a testament to our people and the strength of our culture.

Our long-term planning process facilitated a smooth CEO succession as well as the transition of other key senior management positions in the Company. We continue to maintain rigorous customer satisfaction metrics and strong customer relationships as we continue to deliver leading products and services to our customers. Our strong balance sheet and financial flexibility facilitated our ability to maintain our quarterly dividend and to opportunistically pursue further growth with our pending acquisition of the Warrick rolling mill, which is expected to close on March 31st. I'm very proud of the performance of the Kaiser team given the unprecedented challenges we faced in 2020.

I will now turn the call over to Neal to review additional detail for the fourth quarter and full year 2020, and then I'll return to discuss our outlook for 2021. Neal?

Neal West -- Senior Vice President and Chief Financial Officer

Thanks, Keith. Turning to slide 8. Value-added revenue for full year of 2020 of $697 million declined from $856 million in 2019 reflecting an approximately 20% decrease in shipments primarily due to the significant COVID-19-related impact on commercial aerospace demand. In addition, during the second quarter, virtually the entire North America automotive supply chain shutdown operations which temporarily affected demand for our automotive applications.

Overall, demand for our general engineering applications remained solid throughout the year. Aerospace/high-strength value-added revenue of $369 million declined approximately 28% year-over-year and is 37% decline in shipments compared to the strong demand levels experienced in the prior year. The benefit of a record first quarter 2020 strong demand for our defense-related application and the $15 million of additional revenue recognized in the third quarter related to the modifications to 2020 customer declarations under multi-year contracts partially offset the COVID-19 impact on our commercial aerospace demand and a significant second-half decline in shipments.

Automotive value-added revenue of $83 million declined approximately 11% year-on-year on an 11% decrease in shipments, reflecting strong first-quarter shipments, followed by the impact of the OEM shutdowns in the second quarter due to COVID, and a sharp recovery that began late in the second quarter and continued throughout the second half of the year as the auto supply chain returned to full production and new program launches began to ramp up.

General engineering value-added revenue of $239 million increased approximately 3% year-on-year on relatively flat shipments and stable pricing throughout the year. Value-added revenue for the fourth quarter 2020 of $152 million reflected continued strength in demand for our general engineering, automotive, and defense-related applications. Additional detail on value-added revenue and shipments by end market applications can be found in the appendix of this presentation.

Turning to slide 9. Adjusted EBITDA for the full year 2020 of $154 million declined approximately $59 million from $213 million in 2019. Primarily reflecting a negative sales impact of approximately $74 million and $14 million of manufacturing inefficiencies, offset by $17 million reduction in plant and corporate overhead costs and a $12 million of lower major maintenance in incentive expense. Despite the significant decline in sales, full year 2020 EBITDA margin of 22.1% compared favorably to the 24.9% in the prior year reflecting our variable cost structure and strong execution in flexing costs and operations with changes in market dynamics. Adjusted EBITDA for the fourth quarter 2020 was $29 million reflecting an EBITDA margin of 18.8%.

Moving on to slide 10. Reported operating income for 2020 of $81 million. Adjusting for $21 million non-run rate charges, adjusted operating income was $102 million, down from $164 million in the prior year. The decline in the operating income as adjusted primarily reflected the decrease in EBITDA previously discussed and approximately $3 million of higher depreciation expense. The $21 million of non-run rate charges primarily reflected an $8 million restructuring charge for severance and benefit costs, $5 million reserve increase for ongoing legacy environmental cleanup projects, and approximately $6 million related to diligence and legal fees associated with the work acquisition. Reported net income for 2020 was $29 million compared to $62 million for 2019.

Adjusted for non-run rate items in both periods, adjusted net income was $48 million in 2020 compared to adjusted net income of $111 million in 2019. The $48 million adjusted net income reflected the impact of the lower operating income and an increase of approximately $16 million of pre-tax interest related to our recent bond offering.

For 2020, our effective tax rate was 26% reflecting our expected blended federal and state tax rate. Long term, we continue to believe our effective tax rate will be in a mid 20% range. Under the current tax regulations. Our net federal cash tax refund in 2020 was $12 million related to monetization of our A&P and other tax credits. We anticipate that our cash tax rate will remain in the low single digits until we consume our federal NOLs of approximately $94.6 million as of year-end 2020. As reported, earnings per diluted share were $1.81 in 2020 and $3.83 in 2019. Adjusted earnings per diluted share were $3.01 and $6.85 for 2020 and 2019, respectively.

Turning to slide 11. Adjusted EBITDA of $154 million funded all other cash requirements during the year, including capital investments, interests, dividends, and share repurchases. Working capital reduction was driven by reduced inventory in customer receivables due to lower shipments. During the second quarter 2020, we further strengthened our liquidity and financial flexibility by issuing $350 million of 6.5% senior unsecured notes that mature in 2025.

Capital spending for the full year was approximately $52 million primarily related to critical sustaining capital projects and other organic investment opportunities to further our automotive growth and enhance efficiencies throughout our operations.

For the full year, total cash return to shareholders was $56 million, reflecting $43 million in quarterly dividends and approximately $13 million in share repurchases. As a reminder, we suspended our share repurchases in early March 2020. Management and our Board of Directors continue to remain committed to maintaining and increasing our quarterly dividend. We announced a 7.5% increase in our first quarter 2021 dividend to $0.72 per share, which was paid in early February 2021. This increase follows the 12% increase in our quarterly dividend in early 2020. At year-end 2020, total cash of approximately $780 million and more than $252 million of borrowing availability in our revolving credit facility provided total liquidity of $1 billion.

There are no borrowings under our revolving credit facility during the quarter, and the facility remains undrawn. As Keith mentioned, we anticipate closing the acquisition of the Warrick rolling mill and related operations on March 31st, 2021, at which time we will utilize $587 million of cash on hand to fund the transaction. And we will assume approximately $83 million of other post-retirement benefit liabilities.

And now, I'll turn the call back over to Keith to discuss our 2021 outlook.

Keith A. Harvey -- President and Chief Executive Officer

Thanks, Neal. I'll now review our '21 outlook beginning on slide 13. Although we expect continued improvement from the second half 2020 run rate, we anticipate full year 2021 value-added revenue to be down 5% to 8% year-over-year following a record first quarter and strong first half 2020 as demand and commercial aerospace continues to slowly recover and destocking continues in the supply chain.

We are encouraged by positive signs supporting long-term recovery in this market, including the recertification of the 737 MAX late last year and an expected 20% to 30% increase in build rates for the Joint Strike Fighter in 2021. We expect shipments to continue to improve throughout the year.

Ongoing dialog with our commercial aerospace customers continues as we work to manage short-term needs and plan for longer-term opportunities as we anticipate a full recovery in the 2023-2024 timeframe. We continue to believe that aerospace demand will return to a long-term 3% to 5% compound annual growth rate and remain committed to meeting the long-term needs of our customers. Although we have placed our previously announced Trentwood capacity expansion plans on hold, we will continue to evaluate market conditions, and we'll be prepared to move forward with our investments as we gain more visibility and clarity around the expected recovery for large commercial aerospace demand.

Moving to slide 14. We anticipate exceptionally strong shipments and value-added revenue for our automotive extrusion applications in 2021. North America build rates are expected to increase from 13 million vehicles in 2020 to over 16 million vehicles in 2021, and for several years beyond that. While we experienced lower demand in 2020 due to COVID disruptions in the supply chain, we successfully initiated multiple program launches in the second half of the year.

With more program launches planned throughout 2021 combined with low inventories of vehicles, we expect shipments and value-added revenue both to increase 35% to 45% year-over-year in 2021. As we look forward, we anticipate growth for our aluminum extrusions at a 10% to 20% compound annual growth rate for Kaiser content growth over the next three years with long-term growth returning to the mid- to high-single digits.

Moving to slide 15. Our outlook for general engineering continues to reflect strong demand for our products driven by a number of end markets including semiconductor, manifold bar, automotive applications, and a strong demand from our service center customers, who are working hard to meet the needs of their customers and restock their inventories.

We anticipate value-added revenue and shipments for our general engineering applications will increase 10% to 15% year-over-year driven by strong demand and a continued trend toward reassuring of OEM supply chains to minimize risks and further disruptions.

Moving to slide 16 and a summary of our 2021 outlook. For the full year 2021, we anticipate continued improvement from the second-half run rate with total value-added revenue up 5% to 10% year-over-year and adjusted EBITDA margin comparable to 2020. We anticipate capital spending for 2021 will be $50 million to $60 million, primarily focused on sustaining capital investment. We will provide further updates to our capital spending for 2021, following completion of the pending acquisition of the pending acquisition of Warrick as we have identified additional organic growth opportunities during the diligence process.

Moving to slide 17, and a brief discussion around our pending acquisition of Warrick as we announced in late 2020 and the outlook for the North American beverage and food can packaging industry. We anticipate closing on the transaction on March 31st, and look forward to welcoming the Warrick employees to the Kaiser Family. Our planned acquisition of the Warrick rolling mill provides an opportunity for further value creation with strong secular growth in the non-cyclic packaging industry. The transaction is expected to be immediately accretive to earnings and cash flow.

As we noted at the time of the announcement, Warrick generated value-added revenue of approximately $500 million and adjusted EBITDA of approximately $90 million for the last 12 months ending September 30th, 2020. We will provide a further update on our consolidated full year outlook for 2021 during our first-quarter earnings call in April. The outlook for beverage and food packaging market is strong and favorable demand and industry dynamics driving growth for the foreseeable future. Demand for these products was up 5% year-over-year in 2020 and is projected to increase an additional 3% to 5% in 2021.

The North American food and beverage can market continues to be supplemented with import material due to demand versus domestic supply imbalances. And these domestic supply deficits are expected to continue through 2025 at current forecast driven by the growing demand and recognition of aluminum as a material of choice due to its infinite recyclability and a preference for its use in growing specialty drinks and some still water products by consumers and can makers. The Warrick rolling mill is one of only four dedicated can sheet mills in North America, and we expect to become a significant participant in the supply chain solution in meeting the growing North American demand.

Turning to slide 19, and a summary of our closing remarks. We finished a turbulent 2020 with solid performance, a strong balance sheet with $1 billion in liquidity. We entered into a definitive agreement to complete a transformational acquisition which is anticipated to close on March 31st, and is expected to be immediately accretive to earnings and cash. The Warrick acquisition diversifies our portfolio into non-cyclic packaging industry. It's highly complementary to our aerospace, automotive, and general industrial cyclic end markets, and provides excellent opportunities for long-term growth.

We have strong positions with blue chip customers in each of our served markets and are poised for further growth. While commercial aerospace demand has a slightly longer path to recovery, we have solid long-term agreements in place to secure our positions with full recovery expected in 2023 and 2024. Our long-term defense contracts are expected to continue to partially offset lower commercial aerospace demand with solid growth expected in 2021. Both automotive and general engineering markets are expected to be robust in 2021.

And we are well-positioned with capacity, new programs, long-term supply agreement, and strong relationships with our automotive and service center partners. Our Kaiser business cycle strategy, which guides us in operating in volatile market conditions, has us well-positioned and poised to improve margins in our operations as volumes and market conditions improve.

Our balance sheet remains solid and is expected to remain so after the closing of the Warrick transaction. We recently announced our 10th consecutive year for dividend increases with an announced 7.5% increase in 2021 following a 12% increase in 2020. Our commitment to return excess capital to our shareholders remains one of the pillars of our capital allocation priorities.

As we look forward, 2021 will be a very exciting year for our Company. We celebrate our 75th anniversary this year, and I think our founder, Henry J. Kaiser would be proud of how we have positioned the Company for continued success for years to come. We remain focused on executing our strategy while continuing to work safely in a very tough environment disrupted by the pandemic. But our future is bright, and there is a growing excitement as we add a thriving packaging business into the Kaiser portfolio, and welcome the 1,200 Warrick rolling mill employees to Kaiser Aluminum.

With that, I'll now open the call to any questions you may have.

Questions and Answers:

Operator

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] There are questions from Josh Sullivan from The Benchmark Company.

Josh Sullivan -- The Benchmark Company -- Analyst

Hey, good morning.

Keith A. Harvey -- President and Chief Executive Officer

Good morning, Josh.

Josh Sullivan -- The Benchmark Company -- Analyst

On just, on the Warrick acquisition and the operations, can you tell us about any of your customer contracting that might be up for renegotiation this year, or just what we should be thinking about as far as the contracting cycle at Warrick?

Keith A. Harvey -- President and Chief Executive Officer

Sure. The cyclic contract for the packaging business affairs, what we've seen to be in the two to three-year type framework. We know that through the diligence, there were already begun negotiation with some contracts in 2020 and that is continuing through 2021. So the short-term, most of the contracts, or build facility is basically booked for the balance of this year. And they are currently looking out through the 2023-2024 timeframe.

Josh Sullivan -- The Benchmark Company -- Analyst

And then as you think about those expansion efforts that were previously just focused on Trentwood, and now you have the Warrick operations. Can you talk about how you're going to think about the expansion between or how are you going to allocate those capital improvement dollars as we go down the road?

Keith A. Harvey -- President and Chief Executive Officer

Sure. The pandemic has created a pause for us which may turn out to be quite beneficial. As I mentioned in my remarks, during the diligence process, while they've done a great job at the Warrick facility, we see opportunities for some immediate investments to further that growth in momentum that's going on there. We're able to do that in the pause of where aerospace is, but in all of our planning processes and to our capital prioritization, we're looking at being able to fund both growth legs in that area. So when the aerospace comes back, we fully intend to reinstigate that program and put back capacity in place to meet the long-term needs of our customers.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. And then just one on automotive, given the growth you're looking at with the new product launches here, can you talk a little bit about the penetration of aluminum content on those new models. I think in the past you've talked about aluminum penetration growing at about 8% above SAAR. Yeah, just curious what the new models suggest as far as that kind of penetration story?

Keith A. Harvey -- President and Chief Executive Officer

Well, it's a great question. We have -- look at SAARs growth year-over-year, it's roughly a 23% increase year-over-year expect. And so we're announcing a 30% to 40%, 35%, 30% to 40% type of increase. You could see that our penetration is in that 8% to 10% and above range that we talked about long-term. So that's still in line and we're actually seeing that accelerate slight over the next few years.

Josh Sullivan -- The Benchmark Company -- Analyst

Okay. And then just one last one on the general engineering side, just the semiconductor exposure, can you talk about the visibility there. Do you think -- how much of a cycle should we see in kind of demand for that as they build a little capacity here?

Keith A. Harvey -- President and Chief Executive Officer

Yeah, everything we see and hear, Josh, is that this thing, which has had legs in 2020, we see this continuing throughout 2021. Then well-publicized the shortages of semiconductor chips and all of that, and what we're seeing is continued growing demand. We expect to probably place even more growth in the GE business as we go forward this year because of that demand. And so we see that well through 2021, maybe end of 2022.

Josh Sullivan -- The Benchmark Company -- Analyst

Got it. Thank you for your time.

Keith A. Harvey -- President and Chief Executive Officer

Thank you.

Operator

And we have no further questions at this time. I will now turn it back to Keith Harvey for final remarks.

Keith A. Harvey -- President and Chief Executive Officer

Well, thank you very much for your time and interest in Kaiser Aluminum. I look forward to updating you on our first-quarter results and our outlook and plans for the balance of '21 during our first-quarter earnings call in April. Have a good day.

Operator

[Operator Closing Remarks]

Duration: 31 minutes

Call participants:

Melinda C. Ellsworth -- Vice President of Investor Relations and Corporate Communications

Keith A. Harvey -- President and Chief Executive Officer

Neal West -- Senior Vice President and Chief Financial Officer

Josh Sullivan -- The Benchmark Company -- Analyst

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