Kaiser Aluminum Corp (KALU) 2025 Q4 法說會逐字稿

Greetings, everyone, and welcome to the Kaiser Aluminum Corporation fourth-quarter and full-year 2025 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando, Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Kaiser Aluminum's fourth-quarter and full-year 2025 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page of 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 Chairman, President and Chief Executive Officer, Keith Harvey; and Executive Vice President and Chief Financial Officer, Neal West.

Before we begin, I'd like to refer you to the first four 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 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, 2024.

The company undertakes no duty to update any forward-looking statements to conform the statements 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 financial 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 efforts.

Any reference to EBITDA and our discussion today means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. Further, slide 5 contains definitions of terms and measures that will be commonly used throughout today's presentation. 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?

Thanks, Kim, and good morning, everyone. Thank you for joining us. I'll begin on slide 7. I'm pleased to report that our fourth quarter results continue to build on the momentum we've established throughout the year. This marks our fifth consecutive quarter of performance ahead of our internal expectations and we exceeded the full-year outlook we provided in October. Start-up costs moderated versus the prior two quarters, while metal pricing remained a tailwind.

For the full year, we delivered more than 25% EBITDA growth with margins above 21% and second half margins improving to nearly 24%, driven by our packaging investment that enhanced our mix along with modest operational progress in multiple areas of the business. Overall, we achieved record EBITDA in 2025 and established a solid foundation for continued growth as we move into 2026. We are positioned to harvest the returns from our recent investments, continue strengthening margins and generate free cash flow as we execute efficiently across the portfolio.

With that, I'll turn the call over to Neal to review the quarter and full-year financial results. I'll then return to discuss our end market trends, our 2026 outlook and the strategic priorities that will guide us in the years ahead.

Thank you, Keith, and good morning, everyone. I'll now turn to slide 9 for an overview of our shipments and conversion revenue. Our full-year total net sales were $3.4 billion after adjusting for the hedge cost of alloy metal of $1.9 billion, our conversion revenue for the year was $1.5 billion, relatively consistent with 2024. Our total shipments were GBP1.1 billion, down GBP64 million or 5% from 2024. Looking at each of our end markets in detail. Aerospace and high-strength conversion revenue totaled $457 million, down $73 million or approximately 14% and primarily due to a 16% decrease in shipments attributed to the commercial aerospace OEM destocking of plate products and the impact of the planned Phase 7 investment, which occurred in the second half of the year.

Commercial aerospace OEM destocking began to ease exiting the fourth quarter of 2025. Across our other aerospace high-strength applications that includes the business threat defense and space end markets demand has remained strong. Packaging conversion revenue for the year totaled $544 million, up $54 million or approximately 11%, driven by our planned transition to coated products as we finalize commissioning of the new coating line.

While shipments declined by [32 million pounds] during this transition, reflecting a slower ramp-up of the coating line than originally anticipated, the shift is generating higher conversion revenue per pound, supported by the strong underlying market demand.

General engineering conversion revenue for the year totaled $331 million up $14 million or approximately 4% year over year on a 6% increase in shipments. Tariff-driven reshoring activity and KaiserSelect quality attributes continue to create a favorable demand backdrop, supporting both volumes and pricing. And finally, automotive conversion revenue for the year totaled $122 million, up 2% year-over-year and a 6% decrease in shipments primarily due to persistently high interest rates and tariff-related customer uncertainty affecting the automotive industry on a whole.

However, improved pricing and product mix helped offset the lower shipments. Additional details on conversion of revenue and shipments by end market application can be found in the appendix of this presentation. Now moving to slide 10. Reported operating income for 2025 was $189 million after adjusting for non-run rate income of approximately $1 million, our 2025 adjusted operating income was $188 million, up $63 million from 2024.

In addition, 2025 operating income included a $6 million increase in depreciation expense associated with the Trentwood rolling mill Phase VII expansion project and the commissioning of the new coating line at Work. An effective tax rate for the full year was 25% comparable to 2024. For the full-year 2026, we expect our effective tax rate before discrete items to be in the mid-20% range including the impacts related to the new tax bill recently signed into law. Additionally, we anticipate that the 2026 cash tax payments for federal and state foreign taxes will be in the $5 million to $7 million range.

Reported net income from 2025 was $113 million or $6.77 per net income per diluted share compared to net income of $66 million or $4.02 net income per diluted share in the prior year. After adjusting for net pretax non-run rate income of approximately $15 million primarily related to legacy land sales and insurance settlements associated with prior year claims. Adjusted net income for the year was $100 million or $6.03 adjusted net income per diluted share.

This compares to adjusted net income of $60 million or $3.67 adjusted net income per diluted share in 2024. Now turning to slide 11. Adjusted EBITDA for the year was $310 million, up approximately $69 million from 2024. Adjusted EBITDA as a percentage of conversion revenue improved to 21.3% approximately 470 basis points above our 2024 margin of 16.6%. In 2025, we also incurred approximately $47 million of nonrecurring operating and other related costs, primarily associated with our new coating line start-up at Work and planned Trentwood outage which were more than offset by the impact of metal lag gain from rising metal prices.

The improvement in adjusted EBITDA, even with the 5% year-over-year decline in shipments reflects resilient underlying fundamentals across our business and our end markets, along with a richer mix of value-added products. Now turning to a discussion of our balance sheet and cash flow. At the end of December 31, 2025, total cash of approximately $7 million and approximately $540 million of net borrowing availability in our revolving credit facility resulted in a strong liquidity position of $547 million.

As a reminder, the October extension of our $575 million revolving credit facility further demonstrates the strength of our balance sheet and the continued confidence our lenders have in our long-term strategy. The extended facility is set to mature in October 2030. Additionally, in November, we completed a $500 million offering of senior notes due in 2034 with favorable terms.

We used the proceeds along with revolver borrowings and available cash to redeem our 2028 notes effectively completing a planned refinancing that extends our long-term debt maturity profile and supports our long-term financial flexibility. Our senior notes interest costs are fixed at $54 million annually, and as of the year-end, our net debt leverage ratio was 3.4 times, an improvement from the 4.3 times at December 31, 2024.

Our full-year 2025 capital expenditures came in at $137 million, following the completion of our major growth projects at Warrick and Trentwood. It is important to note that, that $168 million usage of working capital during 2025 was a direct impact to rising metal prices through the year. For 2026, we expect capital expenditures to be in the range of $120 million to $130 million, with free cash flow anticipated to be in a range of $120 million to $140 million subject to metal price movement and resulting impact in working capital. As a reminder, we define free cash flow as cash flow from operations less capital expenditures.

Additionally, in 2025, we returned approximately $51 million to our shareholders through dividend payments, marking our 19th consecutive year of dividend payments to our shareholders. On January 13, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reflecting our ongoing commitment to disciplined capital allocation and delivering long-term value to our stockholders. With that, I'll turn the call back over to Keith to discuss our outlook. Keith?

Thanks, Neal. Let me now turn to our outlook and priorities as we move into 2026 on slide 13. In 2026, Kaiser will celebrate its 80th anniversary, a milestone that speaks to the resilience of our operations and the durability of our long-standing customer relationships. Fittingly, our outlook reflects what we expect will be record years for both conversion revenue and EBITDA.

I'll begin with aerospace and high-strength products. We expect shipments to increase in the range of 10% to 15% in 2026 with conversion revenue expected up approximately 5% to 10%. This implies conversion revenue per pound, consistent with our first half 2025 run rate as last year's second half benefited from a richer aerospace extrusion mix as we upgraded plate line at Trentwood.

The Phase VII install was executed seamlessly and timed well to support the demand growth we expect in 2026 and beyond. Commercial aircraft production continues to recover with increasing build rates at our OEM partners. We are well positioned to support that growth with the additional plate capacity from Trentwood.

As we've discussed previously, destocking at commercial OEMs has continued to temper near-term sell-through of plate products. However, we expect this to largely dissipate as we exit the year, if not earlier. We will continue to update you throughout 2026 on supply chain conditions. Importantly, I'm very encouraged by the momentum building in one of our premier markets, momentum that should benefit results in 2026 and continue to build through the end of the decade.

Defense and business jet demand remains consistent, and we continue to benefit from new opportunities across space and specialty platforms. Now moving to packaging. Packaging demand and fundamentals continue to improve, supported by our long-term contracts that provide excellent visibility. Importantly, we completed our final contract commitment at this facility during the fourth quarter of 2025. For 2026, we are targeting shipment growth of 5% to 10% and conversion revenue growth of 15% to 20%. Our fourth coating line at Work is fully commissioned, qualified and progressing towards full production. This investment shifts our mix toward higher coated volumes now at approximately 75% and growing and supports the margin uplift we've targeted.

The progress at Warrick reflects a multiyear journey that began with a strategic decision to acquire the facility in 2021. In 2026, we expect to see a step change in financial and customer satisfaction performance in this business. As we previously stated, while profitability will improve meaningfully in 2026, the line will not yet be operating at its optimal rate. We plan to operate at approximately 80% utilization as we continue to fine-tune quality and reliability.

Customer service remains a core tenet of Kaiser's values and a key differentiator in all our markets. Now turning to general engineering. We expect another year of growth, supported by improving GDP and strengthening demand in the semiconductor market. Shipments and conversion revenue are expected to grow approximately 3% to 5% year over year, with the potential for even stronger growth depending on the strength of the North American economy as inventory levels at most customers remain at multiyear lows.

Our businesses are well positioned to respond quickly as these markets continue to improve. Now turning to automotive. Automotive opportunities continue to expand. Even as we remain highly selective in the products and services we provide to this market. The shift towards more internal combustion engine vehicles in the light truck and SUV category are driving demand for several of our products at a faster pace than previously anticipated.

To support this expected multiyear demand outlook we will be retooling select facilities and adding incremental capacity. While shipments and conversion revenue in 2026 are expected to decline approximately 5% to 10% year over year. This primarily reflects planned outages, most notably at our Bellwood facility associated with retooling rather than underlying demand. These actions position us to support higher demand and higher returns as market conditions evolve.

Now turning to slide 14 and our summary outlook. With our two major growth investments now behind us, 2026 will mark a shift toward harvesting returns through margin expansion. With the execution risk of large-scale projects largely behind us, we are proactively intensifying our focus on reducing both manufacturing and operating costs to drive additional operating leverage and maximize the return on these investments. These actions are expected to also strengthen cash flow, continue reducing our debt leverage ratios and improve our customer service standards.

As we look ahead, we are establishing an initial outlook for 2026 of 5% to 10% conversion revenue improvement year-over-year, with resulting EBITDA growth of 5% to 15%, setting the stage for another record EBITDA performance year for the company.

While metal pricing was a meaningful contributor to our performance in 2025, our expectations for 2026 are driven primarily by operational execution with metal assumptions aligned with current future curves. In closing, we entered 2026 with a strong foundation, clear visibility into our end markets, and the assets firmly in place to deliver meaningful improvement in profitability and cash generation. We look forward to updating you on our progress throughout the year. With that, I will now open the call to any questions you may have. Operator?

(Operator Instructions) Bill Peterson, JPMorgan.

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 color for the difference between the shipments and conversion revenue outlooks.

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 two 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 two-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 Coat 4, 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.

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, would this 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?

Yeah. 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 100% 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 we'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.

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?

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 you may have expected.

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.

Yeah. 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.

There are no questions in queue at this time. I would like to turn the call back to Mr. Keith Harvey for closing comments.

All right. Well, thank you for joining us today. We're off to a strong start to the year, and we're excited for our 2026 prospects, and I look forward to sharing details on our continued progress in April. Have a good day.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.