Kaiser Aluminum Corporation (KALU) 2026 Q2 法說會逐字稿

Greetings. Welcome to Kaiser Aluminum Corporation's second-quarter 2026 earnings conference call. (Operator Instructions) Please note, this conference is being recorded.

I will now turn the conference over to Kim Orlando with Investor Relations. Thank you. You may begin.

Thank you. Hello, everyone, and welcome to Kaiser Aluminum's second-quarter 2026 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.

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 31st, 2025. 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 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 effort.

Any reference to EBITDA in 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. Good morning, everyone, and thank you for joining us. I'll begin on slide 7. We're very pleased with our second-quarter performance. As we look back on this exceptional quarter, the most notable development was the continued strengthening demand across most of our key end markets. Activity accelerated throughout the period at a pace that exceeded our expectations, driving another record quarter for conversion revenue supported by favorable price and mix.

Higher volumes also translated into improved operating leverage and, when combined with favorable metal dynamics from widened scrap spreads, contributed to EBITDA results that significantly exceeded our expectations. While we've been highlighting improving market conditions for several quarters, the breadth and pace of the recovery proved stronger than we anticipated.

Favorable metal lag provided an additional tailwind in second quarter, but the underlying story is increasingly one of stronger customer demand, improving market conditions, and strengthening business fundamentals. These are exactly the market conditions we have been preparing the business for through the strategic investments we've made across our portfolio over the last several years.

As demand strengthened throughout the quarter, we made a number of deliberate operating decisions to support customer requirements, increase throughput, and position ourselves to capture the opportunities in front of us. Those actions included targeted investments in labor, production capacity, and other operating initiatives designed to support growth, improve customer service, and maximize the value of the stronger market conditions.

We believe these were the right decisions for the long-term success of the business. And while some of those investments will continue through the balance of the year, they reflect the strength of the demand environment rather than a change in our underlying cost structure.

As we look ahead, our outlook assumes aluminum prices remain relatively stable through the end of the year at current levels, resulting in a more typical contribution for metal-related items versus the significant tailwinds we experienced during the first half of the year. In addition, the second half will include normal seasonal factors, higher planned spending, facility upgrades, and other projects that were less significant during the first half of the year and are intended to support future growth and improved operational performance.

While our updated outlook does not assume a continuation of the exceptional pace established during the first half, this is not a change in the trajectory of the business. The demand environment today is stronger than we anticipated entering the year and now moving into 2027 as customer activity continues to build across many of our in-market applications.

Subsequently, we are seeing the benefits of the investments we've made over the last several years. While quarterly results will naturally fluctuate as metal, maintenance, seasonality and other timing-related items move through the yearly business cycle, our confidence in the long-term earnings power and margin potential of Kaiser have only increased.

With that framework in mind, let me spend a few minutes discussing the key developments we're seeing across our end markets before turning the call over to Neal for a review of the quarter and our updated outlook.

Turning to the end market summary on slide 8, so beginning with aerospace and high strength, I would characterize the quarter as another step forward in the progression we've been discussing over the last several quarters. What began as a recovery story has returned to a growth story. Commercial aerospace continues to improve as build rates move higher and inventory destocking continues.

But just as importantly, we're seeing continued strength across the broader portfolio. Demand in defense, space, bizjet, and other high-strength applications remains robust, reinforcing our view that this is not being driven by a single in-market or platform. While those trends support our confidence in the longer-term outlook, it's important to recognize that much of our capacity is already committed and we continue to expect results to trend toward the high end of our previously communicated range.

The demand environment we're seeing today provides increasing confidence that these trends extend well beyond 2026. The investments we've made at our Trentwood operation were designed to support exactly this type of market environment. And we're now seeing growing utilization of that capacity across multiple end markets.

Our focus remains on execution, maximizing the value of the assets we've recently installed, and ensuring we're well positioned to support continued growth for our customers in the years ahead. We estimate we will track to the high end of our previous outlook for both shipments and conversion revenue dollars for 2026.

Turning to packaging, the quarter was another important step in the transformation of the Warrick operation. Roll Coat 4 continues to ramp well and perform to our expectations. As a reminder, our objective for 2026 was to ramp the output in a disciplined manner to build a world-class operation focused on quality, reliability, and service, the same principles that have long differentiated Kaiser in the marketplace. As a result, we have been focusing on an 80% utilization rate for the new line, prioritizing product quality and on-time delivery while continuing to increase throughput and qualify additional business.

The continued shift toward higher value-added coated products is driving improved conversion revenue and profitability, with customer demand remaining well ahead of available industry capacity. What is particularly encouraging is that despite operating at roughly 80% of our targeted quarterly shipment capacity on the new line, Warrick generated the highest conversion revenue performance in its history. That result underscores the strategy we have consistently discussed, maximizing value rather than simply maximizing volume.

While shipments are expected to finish within our previously communicated range of 10% to 15% growth, the continued mixed shift toward coated products positions us to finish at the high end of our previously communicated conversion revenue growth outlook of 20% to 25%. More importantly, we believe there remain significant opportunities ahead.

While the progress at Warrick has been substantial, we have not yet fully optimized the assets or realized the complete benefit of the mixed transformation underway. The facility is performing well, but we are still in the early stages of capturing the full operating leverage and cost efficiencies we expect from the investment.

As we continue to increase capacity and move toward our targeted run rate levels in early 2027, we see additional opportunities to improve both profitability and customer service performance. As a result, we remain focused on increasing throughput, improving operating performance, and continuing to leverage our position as one of North America's leading suppliers of coated packaging products, while steadily progressing toward the margin profile we have discussed over the last several years.

Turning now to general engineering, I would characterize the quarter as another step forward in what has become one of the more encouraging stories within our portfolio. What initially began as a recovery, supported by reshoring activity and improving industrial demand, has increasingly transitioned into a broader growth story. Customer inventories remain low by historical standards, booking activity remains healthy, and the lead times continue to extend across many of our product lines, providing additional evidence that demand is strengthening.

We are particularly encouraged by the continued improvement in semiconductor-related demand, where customer discussions have increasingly shifted from inventory management towards securing available capacity. In fact, this has led to the execution of long-term agreements with several large OEMs and service center partners that increasingly recognize they are competing for capacity on our mills with the highly predictable aerospace and high-strength supply chain.

These customers recognize the value Kaiser brings through KaiserSelect quality, reliability, and technical support, positioning portions of our general engineering portfolio on par and, in certain cases, exceeding the attractiveness of traditional aerospace plate-type products. As a result, pricing and product mix have continued to improve. And while shipments are trending toward the high end of our previously communicated outlook, stronger conversion revenue per pound now supports increasing our annual general engineering conversion revenue outlook to growth of 10% to 15% over last year.

More broadly, the themes we've discussed over the last several quarters -- reshoring, domestic manufacturing investment, semiconductor expansion, and increasing demand for specialized plate products -- are no longer just anecdotes. They have become structural changes in our markets. While we remain disciplined in our outlook, the demand environment today is stronger than we envisioned entering the year. And we believe in general engineering is increasingly benefiting from many of the same strategic advantages driving growth elsewhere in our portfolio.

Lastly, turning to automotive, the story continues to be one of disciplined participation and attractive applications where Kaiser holds strong competitive positions. While broader automotive production remains subject to fluctuations in consumer demand and industry build schedules, demand for the products we supply into light truck and SUV platforms remains healthy.

More importantly, the investments and facility upgrades we've discussed over the last several quarters continue to progress as planned and remain supported by long-term customer commitments. What is increasingly apparent is that the opportunity in front of us is larger than we originally envisioned. The products supporting these investments occupy highly specialized positions within the supply chain, where quality and technical expertise matter greatly.

As a result, we continue to view automotive as a meaningful contributor to future growth and an important component of the longer-term earnings potential of the business. Over the next 12 to 15 months, we will be investing to support the continued demand for these unique products. We are maintaining the outlook previously provided.

Neal will now cover these points in more detail as he walks through financial details related to the quarter. Neal?

Thank you, Keith. Good morning, everyone. I'll now turn to slide 10 for an overview of our shipments and conversion revenue. Conversion revenue for the second quarter was $437 million, an increase of approximately $63 million, or 17%, compared to the prior-year period. Looking at each of our end markets in detail, aerospace and high-strength conversion revenue totaled $136 million, up approximately $9 million, or 7%, primarily due to a 2% increase in shipments over last year.

As noted by Keith, commercial aerospace production continued to strengthen in the second quarter as OEM build rates increased. We now believe that destocking is largely behind us for the majority of our products, except for certain plate products, which we expect to continue to destock for several more quarters. This has allowed us to take advantage of the strong demand of business jet, defense, and space end market applications in addition to strong demand from the semiconductor industry, by utilizing our Trentwood capacity to book additional higher-value-added plate products.

Packaging conversion revenue totaled $174 million, up approximately $44 million, or 34% year over year, driven by ongoing mix shifts toward higher-value-added coated products that generated meaningfully higher conversion revenue per pound. Shipments for the quarter increased 10% over the prior year, reflecting strong underlying demand as we continue to ramp the new coating line to around 80% utilization while we advance quality, qualify additional coatings, and continue to move towards the level of service consistency our customers expect from Kaiser.

General engineering conversion revenue for the second quarter was $96 million, up approximately $10 million, or 12% year over year, on a 7% increase in shipments. The year-over-year increases in both conversion revenue and shipments reflect several factors, including the restocking of multi-year low inventory levels; increasing demand for our Semi-K plate, which is specifically developed for the semiconductor industry; tariff-related reshoring; and our distinct quality, service, and KaiserSelect advantages, which all contribute to a favorable market environment that is supportive of both volume growth and improved pricing.

Finally, automotive conversion revenue of $32 million was flat year over year on an 11% decrease in shipments, primarily due to ongoing conversion to higher value-added products, coupled with a challenging automotive industry backdrop with elevated consumer financing costs and tariff dynamics.

However, demand for light trucks and SUVs, the platforms most aligned with our product portfolio, continue to hold up well among targeted buyers. Additional details and conversion revenue and shipments by end-market applications can be found in the appendix of this presentation.

Now moving to slide 11, reported operating income for the second quarter was $134 million, an increase of approximately $96 million from $38 million in the prior-year quarter. After adjusting for operating non-run-rate charges of $3 million, our second-quarter 2026 adjusted operating income was $137 million, an increase of approximately $99 million from the $38 million in the prior-year quarter.

Reported net income for the second quarter was approximately $97 million, or $5.72 net income per diluted share, compared to net income of $23 million, or $1.41 net income per diluted share in the prior-year quarter. After adjusting for a net operating and non-operating non-run-rate pre-tax benefit of $4 million, adjusted net income for the second quarter of 2026 was $94 million, or $5.53 adjusted net income per diluted share. This compares to adjusted net income of $20 million or $1.21 adjusted net income for diluted share in the prior-year period.

Our effective tax rate for the second quarter was 23% compared to 22% in the second quarter of 2025. For the full-year 2026, we continue to expect our effective tax rate before discrete items to be in a mid-20% range. Additionally, we now anticipate that 2026 cash tax payments for federal, state, and foreign taxes will increase to be in the $14 million to $18 million range due to our improved financial performance.

Now turning to slide 12, adjusted EBITDA for the second quarter was approximately $166 million, up $99 million from the prior-year period. The year-over-year improvement includes $41 million of higher pricing, increased shipments, and improved mix. The remaining net $58 million improvement primarily reflects combined favorable metal tailwinds driven by unprecedented metal price market dynamics.

These combined tailwinds reflect lower inventory consumption costs relative to our hedge costs of alloyed metal pass-through to customers, as well as higher than normal scrap spreads, improved scrap utilization, and a metal lag gain of approximately $13 million as compared to prior-year quarter. The total metal lag gain for the second quarter of 2026 was $27 million.

Our performance was partially offset by certain higher manufacturing costs, including increased shipping rates from elevated fuel prices and higher employee-related costs tied to increased incentive compensation. It is important to note that as we exited the second quarter, 2026, our weighted average cost of metal inventory was approximately in line with the forward aluminum Midwest transaction price curve of $2.45 per pound. As such, we do not expect the continuation of the metal lag tailwinds and are assuming a more normalized scrap spread and utilization environment in the back half of the year.

As Keith noted, we expect strong demand across key end markets, continued transition to high-value coated products and packaging end market, and favorable pricing to be the key drivers of our operational results going forward. We remain focused on improving operational efficiencies and leveraging our recent capital investments to support continued margin expansion.

Now turning to slide 13 for a discussion of our balance sheet and cash flow. We continue to generate solid free cash flow, which we calculate as operating cash flow, less CapEx, of $35 million in the second quarter, despite higher working capital requirements on elevated aluminum pricing. For the full year of 2026, We now expect free cash flow to be in the range of $150 million to $175 million, subject to metal price movement and its impact on working capital.

Our capital expenditures total $24 million in the second quarter of 2026. And for the full year, we continue to expect capital expenditures being in the range of $120 million to $130 million. Our strong cash position resulted in total cash of approximately $59 million and approximately $570 million in borrowing availability on our revolving credit facility, strengthening our liquidity position of $628 million as of June 30, 2026.

As a reminder, our senior notes interest costs are fixed at $54 million annually, and we have no debt maturing until 2030. Given our strong last 12-month EBITDA performance and cash position at the end of the second quarter of 2026, our net debt leverage ratio improved ahead of our expectations to 2.1 times from 3.4 times at year-end, and now in line with our targeted range of 2 to 2.5 times.

Finally, on July 13, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, signaling continued confidence in our long-term strategy to drive profitable growth and advance stockholder value.

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

Thanks, Neal. Now turning to slide 15, taking all of this together, we continue to believe Kaiser is exceptionally well-positioned. The investments we've made over the last several years were designed to capture exactly the type of market environment we're experiencing today, and we're increasingly seeing the benefits reflected across the portfolio. Demand continues to strengthen across most of our key end markets, customer activity remains robust, and bookings now extend well into 2027 in several areas of our business.

Importantly, this is not being driven by any single market. Aerospace continues to recover and grow. Packaging is delivering the benefits of our transformation at Warrick. General Engineering is increasingly benefiting from solid structural demand drivers, along with restocking at service centers, and Automotive demand and subsequent investments will provide future growth in our targeted applications.

While we expect the second half to include a more typical contribution for metal-related items along with higher spending and seasonal factors, the underlying business is performing better than we anticipated entering the year. As a result, we now expect conversion revenue growth to finish near the high end of our previously communicated range of 10% to 15%, while EBITDA is now expected to increase between 45% and 55% year over year.

Our confidence in the long-term earnings power of Kaiser has never been stronger. We remain the premier North American supplier in all of the markets we serve, particularly aerospace and high-strength applications. And today, we are seeing multiple growth drivers strengthening simultaneously across the portfolio. The investments are working, demand is building, and we believe the opportunities in front of us extend well beyond 2026.

With that, we're happy to take your questions.

(Operator Instructions) Bill Peterson, JPMorgan.

Yes, hi. Good morning, Keith and Neal. Nice job on the quarterly execution, and thanks for all the information. Considering the second quarter, I think it's a pretty large beat relative to expectations. Maybe excluding metal lag, can you provide some additional color on what was significantly better than expected in the quarter? It feels broad based, but if you can stack rank, what happened in the quarter that was better than expectations, that would be helpful.

Sure. Good morning, Bill, and thanks for the questions. Listen, it was very broad-based, as we stated in a lot of our comments, Bill. We saw a lot of throughput through the operations. I called out that we went to no expense to try to meet that demand through the quarter. plowed a lot of resources to meeting the demand across the board. General engineering was a little surprise for us, stronger, although we've talked for several quarters in a row how we've seen like nine-year lows in the inventory levels, especially at service centers.

Well, they began to kick in and in spades, and as we predicted and as we've seen multiple times, they were not only buying for the demand, but they're also trying to refill their coffers, their inventories, to meet that rising demand. And when you couple that with the aerospace coming back in and all this, the only way we can react to that is increase the throughput but move lead times out.

So as I stated in there, the surprise to us was how quick the recovery came to us in that demand and how fast we had to move lead times because we're going to keep paramount focus on customer satisfaction during this period.

The packaging numbers speak volumes, if you will. We're seeing really strong demand continue. I'm sure it was driven by World Cup and the typical summer growth that happens in our markets. But while we saw very strong demand -- and again, we're still going through qualifications and so forth on our Roll Coat 4, but we're adding significant volume on the higher value-added side of the business, as expected. So we had a really strong quarter out of that.

Now moving into the balance of the year for that, we still have a very strong expectation and continued performance upgrades, but we also have qualifications and some more bugs to work out of the line. That's why we're focused on that 80% for the year.

And then finally, I would say our automotive. While we thought automotive would be flat and while we have limited our capacities there, we are seeing demand pick up, especially on trucks and SUVs, and we're working with our customers to try to manage through the work that we've got to do and satisfy that growth. So it's one of those times that we've gone through that we're seeing the strong demand across every market we have, almost every product line we have, and we're just ramping as fast as we can to meet those needs.

Yes, thanks for that color. And then considering the second half outlook, and I guess with the context of the unit VAR was better for all segments, the feedback and the shipment guidance would imply unit VAR should trend down for the year. I guess trying to reconcile that relative to seasonality, is there some mixed impact and planned downtime? And then on the profitability, on the EBITDA guidance, it does imply margin pressure as well moving ahead. And so if you do X-like margins, the margins are strong at over 30%. So trying to just reconcile the second half guidance both from sort of a unit VAR as well as EBITDA guidance.

Yes, so the way we tried to explain that in some of the numbers in that we put forward here was that assumption that that tailwind we've been having for the last three or so quarters, three or four quarters. We're assuming that we finally become at par with where the market is. And we put that number out there. because we really don't know if metal is going to continue to rise or if it will drop farther.

The big headwind that we talked about when metal actually occurred in June for us, Bill. Metal moved down roughly $0.30 a pound very quickly, which actually took some of the air out of the cell per second quarter. So we're not assuming that moving forward. we typically will have probably 55% to 60% of our total sales in the first half of the year, normally, compared to the second half of the year. So we're bringing that into place.

We did pause on some major maintenance in the quarter, which we expect will be heavier in the second half. We have to keep these assets in good condition to meet this rising demand. We're rolling that into our outlook. VAR, we're going to have less shipping days in the second half.

So we really don't expect a daily demand or actually a demand decrease through the period. It's just the amount of shipping days we have to participate, and then rolling in planned outages and expected major maintenance, which we typically do in the second half. So that's taking that all into account. So we've got the first half of deliverables we've done. We've taken the second half with that expected, all those points that I made, and that's what's driving the outlook for the year.

Is there anything to call out on a profitability deceleration, the EBITDA deceleration? And I appreciate you taking the questions.

Well, just the fact of removing some of those metal tailwinds. Really don't see necessarily a per-unit decrease taking place. It's going to basically be the metal component and the additional cost associated with some of the maintenance and the outages that we have in place, and it's less shipping days. Otherwise, the demand is strong.

As I mentioned, we're in the Q1 of 2027 on a number of our items, mainly related to plate products and aerospace and high-strength-related products at this point. So that outlook continues to be robust, continues to be higher than we expected. And as you could imagine, what we're doing right now is looking at how we can continue to excel. The expectation is we're resetting contracts for potentially better margin improvement beginning in the first part of the year. We have expected demand continue to rise on GE, which always gives us an opportunity for margin growth.

And we have the ability to shift between -- whether it's Aero, whether it's GE, whether it's specific in GE Semiconductor, we retain that opportunity to really shift or pivot our business to where those margins are best attained. So other than the metal outlook, which we're putting the red flag in the ground at, and with those planned higher spending in the second half, nothing's changed in what we've been seeing the first part of the year.

I appreciate all the color there. I'll pass it on. Thank you.

Thanks, Bill.

Thanks, Bill.

(Operator Instructions) Samuel McKinney, KeyBanc Capital Markets.

Hey, good morning, guys, and congrats on the great quarter.

Thank you very much. Good morning.

Hey, last quarter, you discussed the high-quality standards to which you all hold yourselves at Warrick, and the presentation mentioned the quality coming off our Roll Coat Line Number 4 is improving. What got better during the second quarter and where do you still need to get better?

Sure. Thank you. Well, what got better is the throughput is increasing, okay, especially on the new Roll Coat line. But all of our additional Roll Coat lines perform very well in the quarter. So we had great output in the second quarter. We continued qualifications -- qualifications across the board with new customers, with new coatings that we've needed to qualify. So we've made great strides in that area.

I mean, we still have some bugs that we're working with on the equipment and some of the design that we'll be working out, and that's what we expected for the year. I can tell you that it's very slow from my perspective. I want to be at over 90% delivery performance. But we're starting to see some creep up in our delivery performance. We had some weeks that were in excess of 70% improving. And my goal is 90%. And so we're on our way back to attaining those levels.

And so we're meeting those needs of our customers and the new contracts which we minted for this business. So I'm really pleased. I mean, Sam, we talked about this in 2024. People were asking, what do we see the changes that we're making in this business and what potentials do they provide us?

We gave an outlook of about -- we expected when we started to initiate -- actually, we stated when we -- we're fully implementing our strategy there. We would see 300 to 400 basis points for the entire entity improvement from this strategy movement that we're making at Warrick.

I can tell you, we have achieved the bottom part of that range in where we currently are today. And we still are working toward the full utilization of that mill. So I believe we're actually going to exceed that outlook just from that strategy alone. So I think what I feel much more resolve about is that the strategy is working, that demand is only increasing, and we're really well positioned to take advantage of what we started out when we made the acquisition of Warrick in 2021.

All right. Thanks, Keith. That's helpful. And then within stick and packaging, first half conversion revenue was up almost 30% year over year in packaging. And as you guys continue to increase that richer value-coated mix and improve product quality on the Roll Coat line, should there be any reason not to expect packaging conversion revenue to keep improving in the back half versus the number you posted in the second quarter?

No. No reason to think that it's not going to continue to improve.

Okay. Yes, thank you.

Thank you.

Thank you.

There are no further questions at this time. I would like to turn the call back over to Keith Harvey for closing remarks.

Thank you, Sherry. Well, thank you all for your time and interest in Kaiser Aluminum today. The men and women of this storied company work very hard to successfully execute what's been a long, consistent, and a winning strategy for our company. And for that, I'm extremely grateful. We look forward to discussing our continued progress in October when we review our third-quarter results. Have a good day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.