eFFECTOR Therapeutics Q2 2024 Earnings Call Transcript

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July 25, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Kaiser Aluminum Corporation's Second Quarter 2024 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kim Orlando with ADDO Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Q2 2024 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 President and Chief Executive Officer, Keith Harvey and Executive Vice President and Chief Financial Officer, Neil West.

Speaker 1

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 ks for the full year ended December 31, 2023. 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.

Speaker 1

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 and 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.

Speaker 1

Keith?

Speaker 2

Thanks, Kim, and thank you all for joining us for a review of our Q2 2024 results. Turning to Slide 7. Operationally, our businesses generally performed very well in the quarter as demand met or exceeded expectations. As discussed previously, we have been focused on stabilizing operations, improving efficiencies, lowering cost and aggressively managing working capital. As a result, we generated EBITDA of $54,000,000 during the Q2, which includes a non cash GAAP LIFO charge of approximately $9,000,000 reflecting significant inventory reduction during the quarter.

Speaker 2

Neil will provide more details on the quarterly results in his comments. To summarize activity in our end markets, aerospace and high strength demand mirrored our strong first quarter results despite a reduction of large commercial jet builds in the quarter. This illustrates the strength diversified focus and product mix in this category, which includes defense, space, business jet and industrial applications, all of which remained healthy. In packaging, underlying demand was stronger than expected, but we were unable to capitalize with improved shipments, mainly due to extended planned outages from the Q1 and an unplanned outage in our hot mill during the second quarter, which reduced our shipments. In general engineering, demand and pricing remained stable, following 18 to 20 consecutive months of destocking that abated in April.

Speaker 2

While in auto, we expect we continued to benefit from modest demand improvements and improved pricing. For the remainder of 2024, we will remain focused on the execution of our growth strategy, improving efficiencies across facilities and continuing to execute our metal sourcing strategy to drive enhanced margin performance. I'll now turn the floor over to Neil to discuss the quarter in more detail, and then I'll be back to discuss our outlook. Neil?

Speaker 3

Thank you, Keith, and good morning, everyone. I'll begin on Slide 9 with an overview of our shipments and conversion revenue. Conversion revenue for the Q2 was $369,000,000 a decrease of $10,000,000 or 3% compared to the prior year period. Looking at each of our end markets in detail, aero and high strength conversion revenue totaled $133,000,000 in the Q2 of 2024, reflecting a 2% improvement on a 3% decrease in shipments over the prior year quarter. The increase in conversion revenue was driven by an improved mix of our diversified products for this end market category.

Speaker 3

Package conversion revenue was $119,000,000 a decrease of 11% year over year and an 11% reduction in shipments, primarily due to the unplanned second quarter outage as noted by Keith. General engineering product conversion revenue was $83,000,000 up 2% year over year on a 6% increase in shipments as demand remained relatively stable during the quarter. In addition, the improvement in conversion revenue reflected a higher mix of plate product, which partially offset the decrease in price. And finally, automotive conversion revenue was $33,000,000 up 9% compared to the Q2 2023 on a modest increase in shipments on improved pricing year over year. Additional details in conversion revenue and shipments by end market application can be found in the appendix of this presentation.

Speaker 3

Now moving to Slide 10. Reported operating income for the Q2 2024 was $16,000,000 As noted by Keith, as a result of our continual focus on rightsizing our inventories and reducing our cash inventory working capital needs by $14,000,000 in the Q2 2024, we recorded a non cash GAAP LIFO charge of $9,000,000 during the quarter as we de layered a high cost GAAP LIFO inventory layer. Also following our annual in-depth strategic review of our operating portfolio, we made the decision to exit our Sherman, Texas facility as of June 30, 2024. This resulted in a non run rate restructuring charge of approximately $7,000,000 associated with employment benefit plan and severance payments, which will be paid out over the next few years. The impact of our on our ongoing financial performance will be immaterial as we reposition our customer orders to our other facilities.

Speaker 3

In addition, we recorded an approximately $2,000,000 mark to market non run rate non cash charge associated with certain hedges. After adjusting for the non run rate charges of approximately $9,000,000 adjusted operating income was $25,000,000 down approximately $12,000,000 or 34 percent year over year, predominantly driven by the GAAP LIFO charge and a quarter over quarter increase of approximately $3,000,000 for depreciation and amortization expense. Our effective tax rate continues to be in the low to mid-twenty percent range under current tax regulations. We anticipate that our 2024 cash tax or foreign and state taxes will be in the $4,000,000 to $5,000,000 range with no U. S.

Speaker 3

Federal cash tax until we consume our federal NOLs, which as of year end 2023 were $101,000,000 Reported net income for the Q2 of 2024 is $3,000,000 or $0.19 net income per diluted share compared to net income of $18,000,000 or $1.14 net income per diluted share in the prior year quarter. After adjusting for approximately $9,000,000 of non run rate charges previously mentioned and another $1,000,000 of non operating non run rate items, adjusted net income for the Q2 of 2024 was $11,000,000 or $0.65 adjusted net income per diluted share compared to adjusted net income of $20,000,000 or 1 point 2 six dollars adjusted net income per diluted share in the prior year quarter. Now turning to Slide 11. Adjusted EBITDA for the Q2 2024 was $54,000,000 down approximately $10,000,000 or 16% from prior year period, which was primarily the result of the aforementioned unfavorable non cash LIFO charge. Additionally, the 10 in our 2nd quarter conversion revenue was offset by continued improvement in our metal sourcing strategy, which we have discussed in prior quarters in addition to managing our overhead and manufacturing costs.

Speaker 3

Our resulting EBITDA margin was 14.5% compared to 16.8% last year. Now turning to a discussion of our balance sheet and cash flow. On June 30, 2024, total cash of approximately $70,000,000 and approximately $548,000,000 of borrowing availability in our revolving credit facility provided total liquidity of approximately $618,000,000 with no borrowing under our revolving credit facility during and at quarter end and it remains undrawn. As of June 30, 2024, our net debt leverage ratio is 4.6 times against our target leverage ratio of 2 to 2.5 times. Turning to capital allocation.

Speaker 3

Capital expenditures for the Q2 totaled $44,000,000 as we continue to invest in our Royal Cult 4 project. Our full year 2024 capital expenditures are still forecasted to be in a range of $170,000,000 to $190,000,000 On July 15, we announced that our Board of Directors declared a quarterly dividend of $0.77 per common share, reflecting the confidence our Board and management team have in our strategy to improve our profitability and increase stockholder value over time. And now I'll turn the call back over to Keith to discuss our outlook. Keith?

Speaker 2

Thanks, Neil. Now I'll turn to our outlook for the fiscal year of 2020 4. Beginning with Aerospace on Slide 13. Our positive long term outlook for strengthening commercial aerospace demand remains unchanged, underscored by our customer relationships and platform agnostic position in the market for over 75 years. I'd like to further highlight that our diversification strategy has allowed us to maintain a strong position and remain a key supplier in the defense space and business jet markets, as well as other industrial high strength applications, all of which remain strong.

Speaker 2

However, as noted on our previous call, we revised our aerospace outlook for 2024 to reflect a more cautious stance on the market, primarily related to expected 2024 build rates for domestic large commercial jets and the widely reported Boeing and Airbus production challenges. Given continued lower than expected build rates by Boeing in the first half of the year and slightly lower build rates of approximately down 4% recently announced by Airbus expected for 2024, we are adjusting our outlook for shipments and the corresponding conversion revenue down slightly for the balance of the year. As a result of the lower commercial jet build rates announced for the second half of twenty twenty four, we now expect our full year 2024 aero and high strength shipments and conversion revenue to be down by approximately 2% to 3% versus 2023 levels. Now turning to packaging on Slide 14. As mentioned, the outages we experienced in the first half of the year negatively impacted shipments.

Speaker 2

With the outages now behind us, we expect our packaging excited to be nearing completion of the long anticipated rollcoat number 4 line with expected qualifications beginning in Q4, in line with our internal plan. This significant investment remains on budget with production slated to begin in early 2025. As previously discussed, this project is estimated to convert approximately 25% of our existing capacity to higher value added coated products, which we anticipate will benefit our total company margins by 300 to 400 basis points. Accordingly, we now expect our packaging conversion revenue to improve by approximately 3% to 4% year over year in 2024 due to improved pricing and product mix on a 2% to 3% increase in shipments, reflecting the impact of the extended outages incurred during the Q2. Now turning to General Engineering on Slide 15.

Speaker 2

While demand has remained relatively stable and strong prices have largely held throughout the first half of the year, we are anticipating typical seasonality in the second half of the year, which is expected to be a slight headwind to demand and subsequent shipments. Further, we continue to forecast modest price compression in our outlook as demand has historically slowed in the second half of the year and pricing remains at historically high levels. Therefore, we anticipate our 2024 shipments to improve by approximately 3% to 4% year over year and the resulting general engineering conversion revenue to be flat to up 1% compared to 2023. Next, I'll turn to automotive on Slide 16. While demand remains relatively flat compared to last year, price increases enacted in late 2023 have largely held.

Speaker 2

As a result, we continue to expect our 2024 automotive shipments and conversion revenue to increase in the 3% to 5% range versus 2023. Now turning to Slide 17. I'll turn to our revised summary outlook for the full year 2024. We expect demand on the whole to remain flat to slightly up year over year. Accordingly, we now expect conversion revenue to be flat to slightly up by 1% compared to 2023.

Speaker 2

Concurrently, we expect to improve EBITDA margins by approximately 50 to 100 basis points year over year. In summary, we remain optimistic that the investments we are making today to support future growth positions us well for 2025 and beyond. Looking ahead, our focus remains on driving sustainable profitable growth for the long term, which we will achieve through our strategic investments, stringent cost management and continuous efforts to improve overall operating efficiencies. With that, I will now open the call to any questions you may have. Operator?

Operator

Thank you. We will now be conducting a question and answer Our first question comes from Bill Peterson, with JPMorgan. Please proceed with your

Speaker 4

question. On Aerospace, you now, I guess, taken down expectations a few quarters in a row. I guess, what's changed in the last 90 days? What visibility do you have? I guess this is maybe a new bottom and when should we assume the segment could return to year on year growth?

Speaker 2

Yes. Good morning, Bill. This is Keith. We as we talked, considerable side of our business has really not shown any detrimental activity, Bill. We've seen really good movement in space.

Speaker 2

Business jet continues very strong. Defense remains strong. And the area that's been somewhat challenged has been those well document, well publicized challenges that Boeing continues to have. And Airbus is challenged with some of their supply chain issues. We've noted continuing bookings of opportunities longer term.

Speaker 2

There's been a pretty successful flow of orders at the Farm Boy Air Show. But we're expecting as soon as those guys get those issues and other challenges, those challenges are not being impacted by supply of raw materials, at least on our end, from aluminum. But when those build rates get steady and return back to expected levels, than we anticipate being back in the strength on that side of the coin. We continue to have build rates lower than expected, and we're anticipating that at some point in time, that will flow into reduced orders. Now from a Kaiser perspective, we have minimums in place.

Speaker 2

We have expect there are commitments that are made, and our outlook is improved for 2025 for the declarations that have been made. And so we're just anticipating right now that until we get those build rates back up, we're just filling the pipeline a little bit right now.

Speaker 4

Great. Thanks for that. And as we think about the EBITDA margin, and I think you have long wanted to return to kind of above 20% type of EBITDA margins. I guess, can you help bridge I know some investors were hoping that can even occur to reach 20% sometime next year. I guess, can you help bridge where we are today with getting back to more historical levels of EBITDA margin?

Speaker 4

How fast can that occur given where we are today with some of the operational challenges and market challenges you have? Is this a 25 story or is this more like 26 or beyond?

Speaker 2

No. Yes, Bill, I feel very confident that we're on the track back. We're going to be roughly around, I think, where we've been year to date, roughly around that 15 percent or so tight margin. And if you look at some of the things that we have underway, so we announced the change of the metal strategy, which is going to deliver 150 basis points to 200 basis points. And then you move to the new strategy that we're invoking on coated strategy, which we've indicated are going to deliver the 300 to 400 basis points.

Speaker 2

That puts us right back up around the 20 ish and above level on the margins. And again, we anticipate those things beginning to kick in beginning of 2025. Then you add on top of that the expected return to higher build rates on the commercial aero side and then with the additional capacities that we're putting in on Phase 7, which are going to deliver another 5% to 6% on the relatively higher margin automotive side, then you can see our path going back into the 'twenty and back to the mid-20s and higher over the next 1 to 2 years. And that's on top of getting the efficiencies back to where we've historically had those, okay? And we can see a rise of another 100 basis points to 200 basis points just on getting efficiencies back where we've historically had them across the portfolio of businesses.

Speaker 2

So we've got the outline pretty well directed. We're putting the investments in place. The markets have been a little bit up and down as we've seen with some destocking and restocking, But we don't see any major detriment to our growth plans in place. So I feel very confident that we're moving quickly back to the historic levels and we've got the right things that we're pulling right now to put us in position to take advantage of those market opportunities.

Speaker 4

Okay. I'll pass along and re queue, It's Nina. Thanks for sharing the insights.

Speaker 2

Thank you,

Operator

Bill. There are no further questions at this time. I would now like to turn the floor back over to Keith Harvey for closing comments.

Speaker 2

Okay. Well, thank you for being with us today. I look forward to updating you on our Q3 2024 results in October. Everyone have a good day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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