Good afternoon, everyone. My name is Peter Arment, Senior Aerospace Defense Analyst here at Baird. Very happy to have us with this Kaiser Aluminum Corporation. With us from Kaiser, we have Keith Harvey, who's the President and Chief Executive Officer. He's going to go through some slides, and then I'll have some Q&A. And then if anyone wants to ask a question, we'll certainly try to squeeze you in. So, with that, thanks very much for joining us, Keith.
Thank you, Peter. Thanks for having me. Good afternoon, everyone. I'd like to talk to you a little bit about Kaiser Aluminum this morning. We're a 77-year-old company in existence. We've been in operation in the products that we participate in for that period of time. Many of our long-term relationships with customers extend to that period of time. So, for instance, we were built, the first part of our company, to supply Boeing in the war effort. So, we have a long history with the company. We're about a $1.4 billion in market cap. We have about 4,000 employees and in some very significant and specific markets and product lines, which I'll go through with you. Okay. All the preliminary, boy, they'll be happy I showed all these to you. Okay, a little bit about our highlights. We feel we've got a very strong, diversified portfolio.
We have really strong market positions. Again, we've got a long service with a lot of our customers that are in place. We've enhanced those positions over the last several decades, very strong where we're at. A lot of potential for growth in this company. We've been investing organically and inorganically over $3 billion since 2006. So, a lot of investment in the markets that we elect to participate. Good financial strength and flexibility required for the company. We have about $600 million in liquidity for the company. Recently we made the largest acquisition in the company's history back in 2021, where we entered back into the packaging business. I'll go into that in brief detail.
And then our products are engaged on the sustainability and offer solutions to those customers that are focused on lightweighting, looking at carbon capture and recyclability of aluminum, which is infinite, as most of you know. A little bit about us as a company: We have 13 locations in North America only. The majority of our business is focused in North America, the exception being in our aerospace. We do supply products globally to all the major airframers and a number of defense players around the world. We also export a good bit of our product into semiconductors and to Asian geography. On the right, you'll see the products. Our company basically will sell flat-rolled, sheet and plate, and coil products.
We also are into the long products we call as hard and soft alloy, which go into different scenarios and different applications, and we also supply drawn products. We have the broadest product offering of anyone in our space in North America. Our strategy is very simple and very consistent. We've been operating under this way for the last 25 years. We're a focused facility, so we focus in very particular markets. We don't really deviate in between those. We focus on those areas which have very demanding applications and significant barriers to entry. We try to look for those areas where we can have premium products, so we try to differentiate ourselves in those toughest applications with premium-type products, and we build the moat around those with the product applications and service that we provide from our businesses.
We focus on value creation within the businesses by leveraging the business and working on manufacturing efficiency. Cost is a significant focus, as well as the top-line growth in the business and has been for the last 25-plus years. Moving to the end markets we participate, you can see that a third of our business goes into the packaging. We re-entered this in 2021, re-entered the market. We saw the change that was taking place with aluminum as the substrate of choice with a number of the customers, especially in the packaging and the food industry. We entered back in with the purchase of the Warrick facility from Alcoa in 2021. We do nothing but packaging in that facility. We're not going to move off into industrial or automotive. It was strictly a packaging play.
A third of our business, a little greater than a third, goes into aero and high strength. Again, we've been in these markets for about 75-plus years, not only in the plate products, but also in the long and extruded and difficult-shaped products that go into the plate on this. Our general engineering business utilizes a lot of the same facilities. It goes into the general industrial and the economy. Most of our products get sold either directly to the semiconductor industry or mainly through our service center network. Many companies like Reliance; we've developed. We've worked with them since our existence. We've grown as they've grown. Again, the broadest product offering we bring to bear helps really supplement their strategies and how they want to go to market. And then finally, a smaller part, but a very important part to us, is the automotive side.
Roughly 8% of our conversion revenue, and this is how that's broken out. Where we focus in areas are areas that are agnostic to whether mainly it's an EV or an ICE vehicle. We're on more of those structural-type components like anti-lock braking systems, bumper systems, all whether it doesn't matter what type of vehicle, you have to have those type of applications. We also participate only on extrusions. We elected not to participate on the flat rolled auto body sheet for our own intent and purposes, our own reasonings why after 50 years in the automotive industry. Okay.
Again, where we serve, very small slices of the market of where we participate, only 15% of the global market on the flat rolled side, and about 20% of the North American opportunities are the plays that we've elected to participate based on where the company is trying to derive margin and EBITDA growth accordingly. This one gives a little bit more intel on aerospace and high strength. You can see we bounced back through the conversion here, and we've moved back up into record territory for the business. We see considerable growth going forward, and a lot of this, I think, is more than I had anticipated. I only wanted to go over about four or five slides. There's details here of what demand drivers and so forth, but mainly where we see the entity for the business heading, we're about a $1.4 billion in conversion revenue.
We take out metal costs to just look at our conversion opportunity, our potential to make profit. Okay, so we're about $1.4 billion. Our goal, we believe, with the footprint we have in place and the investments we're making, is to get to a $2 billion conversion market, and today we're operating with EBITDA margins. Historically, we've been in the mid to high 20s%, bringing in and putting in our executing our strategy for packaging. We expect to bring the entire business, which is at 15% today. We're moving back into the 20%, into the mid-20s% with the total footprint of the business.
Terrific. That's a great overview.
Great.
We can leave that slide or wherever we want to go talk to. But why don't we just jump right in on the aerospace side?
Sure.
So, it has not been the most smooth or linear recovery with the OEM. So, how has that impacted you guys? And there's a lot of talk of destocking, things of that nature. How are you guys doing with all that?
Sure. No question, a volatile year, but for anyone that's been in the aerospace business, and I've been there for at least the last 30+ years, we've seen the comings and the goings, the ups and downs of the market, whether or not we had a three-year delay on the A380 or whatever take place, and certainly, the pandemic had a significant impact on the market for a brief period, but historically, what's always happened during these periods of down cycle, we've seen a tremendous bounce back, and we see these markets for long-term CAGR being anywhere from a 3%-4%, pretty good for our market. Again, what you go back to is look at the continued growing air passenger miles, which hasn't slowed down. It may get interrupted for a period, but it always bounces back, moves forward.
We think that growth is really solid going forward, over 12,000 single aisles on order between the two big airframers. And so, that gives us. We've made significant investments for the growth of this over the last several years. I mentioned we invested over $3 billion. A good bit of that has been toward the aerospace. We're on our seventh major expansion at a large rolling mill. And there's only a few rolling mills in the world that are really qualified to supply products to the airframers. We're one of those. And we're on our seventh major expansion. Certainly been a challenge for the year, but I would say COVID was as big, more of a challenge. You saw the. I'll just move back to this slide. You go back and see the dip that we had with the conversion revenue as a response to COVID.
But you see the bounce back that came back. And we're expecting that to continue to grow going forward. So, I can comment that the way we approach the business, we have strong contractual teeth in our contracts with our customers. There's a commitment of capacity on our part, but there's a commitment long-term on their part to make sure that as we go through those dips, we all stay healthy, we all share the challenge. We've been doing that for the last several years. On just the most recent activity, I think it's been very challenging what Boeing's gone through, but I think that they're managing through it and will come out very well on the other side. They've been extremely a strong strategic partner to us through this whole potential. We just had our recent third earnings call.
And I mentioned that Boeing has lived up to their contractual obligations to us through all of this. And we're already seeing a very strong outcome for next year. So, we're booking. We generally get 12 months ahead of time to look at the opportunity for us. And that works well for us on capacity management.
Is that the same for all the OEMs on the lead time like that for you?
I think I won't go into every detail, but I think there may be some unique things that we do. But I think for the most part, all the OEMs understand that we only have limited capacities. And we have others that are fighting for this capacity. We also send a lot of our general engineering product through the same facilities that also deliver aerospace products.
Right.
So, the more knowledge we have, the better we're able to react and plan for this. Generally, when we put in a major investment, it's a two-and-a-half-year endeavor for us. So, we've got to be talking with them a good bit in advance to understand what those capacity needs can be. And then that also comes back in our term. From our position, we don't just put in capacity in the hopes that demand will come. So, we generally look for those commitments ahead of time. We garner those forward, and we'll put in the capacity, and then we share in the outcomes as we go forward.
So, the strike wasn't really much of an impact for you, or was there a pause in activity at all?
There really wasn't for us. However, when you look at supply chain, when you look at the demands that, for instance, Boeing had on moneys, okay, you can't build airplanes at a single-digit or mid-teens rate and buy at a 38 rate for a long time. And now they're reticent about going into a lot of the supply base and saying, "Put a hold on it, stop, we're going to reset," because the last time we did that when we got into 2020 is it took us about a year and a half to two years to come back to where we were back to the rate that we could supply. So, they're pretty aware of that. And they've been very, I think, sensitive to that. And it's different between various whether it's a parts supplier, whether it's a raw material supplier.
A lot of the small moms and pops can't really weather that storm that well. So, I think they've been very strategic about how they've approached this, even with all the challenges they've had. And I think it can be the same by Airbus and others. Everyone's looking at it in a more strategic way, which I think bodes better for us going forward from a raw material position. Okay, so I've been through challenges that they've been through. Wouldn't want to be in their shoes, but proud to be a supplier and happy to be a strategic partner of theirs because they're going to work this out. And the thing that hasn't changed is the demand picture. That demand picture is very strong.
Yeah. You mentioned the commercial aerospace recovery is coming back. How is defense and space for when you think about the demand signals that you're dealing with there?
Yeah. So, defense has been a really big part of our portfolio of business in the aerospace side for years, for decades, actually. And I was explaining to someone earlier, we start out on one of the programs. So, we're one of the main suppliers of aluminum plate for the F-35 program. We were on that program for seven years in LRIP, so on low rate, when they were developing that. We were on that for seven years where they were only making maybe 10 planes or 12 planes or 15 planes a year. But now they're ramping up to about 160 planes, 180 planes a year. And we're on those programs. We're still supplying product that goes into the F-16s, F-18s, all the Chinooks, all the rotary aircraft. So, we're on all those. But we're also on areas of like munitions. So, we don't talk about those too much.
It's a smaller segment of our business, but we see, to answer your question, Peter, we see defense only getting stronger as we go forward, and we'll see, but we have capacities to and program position to be able to take advantage of that.
Okay. Let's switch gears a little bit. I mean, post the election, there's been a lot of discussion around tariffs.
Yeah.
Maybe you could talk a little bit about that, how tariffs and any impact that would have on Kaiser.
Yeah. You know, I watched the metals industry with, especially in the steel side, how they've managed tariffs and worked with those things over the years. The aluminum industry, we really haven't counted too much on tariffs and protectionism, if you will. It's pretty much just go at it and make sure your strategies and tactics enable you to position no matter what the outcome. However, I will say that there are certain areas, and there have been times where we've used anti-dumping that has come in to really protect the industry. And I think when it's deployed correctly and accurately, it has been to the advantage for us. Now, we're a North American-based company. So, I think that the likelihood of tariffs coming is probably fairly high.
I think that bodes well for our company, where we will generally see degradation in pricing of those things or when other economies go south and they come into our country, and they basically usually do that with pricing. And our pricing has held up remarkably well as we've gone through a period of destocking and a little bit of slowing down in 2024. And I believe reshoring took place after the supply chain issues. And I think perhaps what we're seeing, there may be more reshoring happening. So, I think it bodes well for our business long-term.
Got it. Anything that you worry about on the commercial aerospace side other than what we've seen, the disruptions at the OEMs?
Yeah. You know, I think we've seen some of the worst case, some of the worst challenges. You know, that supply chain area, COVID, which really dampened short-term the demand and all this. And certainly all the things that friends at Boeing and others have gone through, those are challenges. But if you go back over a 30-year history in this industry, I can show you bird flu. I can show you.
9/11, you name it.
I can name them. And every time in this market, we've seen a significant bounce back. And then you look at the backlog that we're entertaining today, and I would tell you more is the same. And slowing passenger miles is just not happening.
Right.
Okay, and we still have other parts of the world that are ramping up, India, China, others, so I think long-term, really strong growth ahead of us.
So, let's switch over. You said you made a large acquisition and getting back into packaging. Talk to us about the rationale and what the opportunity you see.
Sure. So, a number of years ago, about 10 years ago, we started looking at the business. We had put in our fourth major expansion. We had three and four other expansions on the road to aerospace. And GE had long general engineering had been a long part of us as well as automotive. And we were looking, where are we going to take the business? We can continue to organically grow and are continuing to organically grow in aero. But we'd made a couple of smaller acquisitions to fill in some of the white spaces we had in our availability to our aerospace customers. But we started to look back toward the packaging side. Kaiser in the 1990s was in a packaging business. We were trying to deliver products through a multipurpose plant. And we had some very strong buyers at the time.
We did not see a way to be successful, and we exited in the late 1990s. Roll forward a couple of decades later to what we saw in the 2020 timeframe. A little earlier than that, we had begun having outreach by canmakers and some others as to what the growth, the potential for growth long-term, sustainable growth, and what was driving aluminum as a substrate, and we started to get a little excited about what we saw for long-term. We looked at what the differences were between the 1990s and then. I think a lot of the end customers, canmakers and all, are now aware there wasn't really any investment in the industry for the previous 20 years. It's because no one could figure out how to make money. Okay, and they became more strategic, just as our aerospace customers became more strategic.
They said, "Look, our growth is dependent upon having a domestic metal supply, okay, that was in position," and the industry had not invested enough to really allow them to attain the growth that they were beginning to see, so, that brought us back into strategic discussions. We saw an opportunity with a facility that was previously owned by Alcoa. We saw it at a good price. Okay. That was very important to us. We had many opportunities over the previous decade, but nothing ever penciled out for us, so, we like this. We like the area. It matches the other businesses. We like to go after very demanding applications, areas where we can really draw a premium if possible. Coated is a very strong position that they have.
So, at this facility, we're one of the largest providers of coated products that goes out to our end customers, both internal and external coated. We provide food and canned food products. You have to coat both sides. That's always value-added opportunity. So, that led us into our strategy to quickly invest in additional roll coat capacity for that business. And we've been transitioning that business over to be a general supplier to more of a coated supplier to that industry over the last three years. And we're just getting ready to launch the new investment. We'll come online in 2025. I already have a lot of contracts against that business, and we're pretty excited about the growth potential.
Yeah. So, just before we get to that, that fourth line, right?
Yeah.
That you're talking about. Yeah. So, on the third quarter, you had very good performance in your packaging, good shipments. How do we think about just the trends that we're seeing in the fourth quarter and what you're thinking about the environment in 2025 before you think about that fourth line coming on?
Yeah. So, demand is very strong. I mean, again, we see this at a 3%-5% CAGR long-term. I mean, at one point, as we were in COVID and so forth, they were seeing 9%-10% CAGR. But we never felt that that was going to be the kind of CAGR would have with the business. But a 3%-5% CAGR equals anything as strong a growth market as we participate in. So, we had strong shipments, but we still haven't enacted our strategy yet. My strategy is around not really enlarging the footprint of scaling up with more volume. I'm looking to really enhance the mix of the product that we provide.
I'm moving heavier into the value-added side of where what you would expect to see going forward is that those conversion revenue dollars, dollars per pound, okay, and then EBITDA margins start to move up, okay, in the business as we really move toward the value-added business. We're looking at just that business along with the metal management and with the movement of the price and the mix on the contracts that we've attained 300-400 basis points for the entire business just on that movement there. We're moving the entire business back into the mid-20s on EBITDA margin. That's the goal and focus we have.
On the fourth line, what is the steps and the hurdles to get that up and running?
Yeah.
How do we think about the qualification process, all that?
Yeah. It's very challenging. The packaging side of the business is as difficult in some areas to make as it is on some of the aerospace products. Okay. Very demanding customers, quality, a lot of the controls that go around it, a lot of the resources to support the customers and markets, very, very strong. So, a very scientifically demanding product. We like that. But where we are is for two and a half years, we've been investing in getting this equipment in place. Again, the order rate and all that, very elongated. But we currently have it pretty well assembled. We're going through our process of qualifying the equipment internally to ourselves. Next step, we'll be qualifying with customers. If you're a newcomer coming into these markets, especially in food or something, it's up to a two-year qualification period to be able to enter and qualify with these customers.
We've been making these products for over 50 years. So, we're going to be bringing that in. We'll be fast-paced. We'll get those qualifications in the early part of the quarter next year and expect to be fully running that equipment line at full speed sometime, hopefully early in the second quarter.
Of next year?
Of next year.
Okay. And so then you run rate as we get into 2026?
Yeah. So, 2026, all of our contracts will have been renegotiated. We'll be fully executing with the new strategy that we have, new equipment, all been foundational. We're getting high single-digit growth rates from our food customers, and we're getting the 3%-5% growth rate for the beverage customers. So, we'll be expanding out and should have significant margin growth next year and the following year and subsequent years, especially as new investments also go in the ground for aerospace.
Right. So, you mentioned the $2 billion conversion and then getting back kind of high 20s, EBITDA. So, your aerospace is your biggest business and it's packaging. Maybe walk us through how you think kind of that aligns up. I mean, obviously, aerospace on a recovery, but kind of the packaging story too.
Yeah. So, aerospace, we're investing in our phase VII. The initial investment at our rolling mill is going in now. It'll be up and running by middle of the year next year. That's not fully committed yet. I expect that we'll be fully committed before the operation is up and running. We've got to break ground to do the next couple of phases of our phase seven that will break ground. We're making obviously the investment in the can sheet. So, we'll see that should deliver full year run rate at 300-400 basis points and another additional 50-100 basis points on recycling investments that we're making. And then we'll get into the significant growth. I expect Boeing to get to 38 rate next year, possibly 42 by the end of the year. Of course, Airbus is at rates higher than that.
I expect demand to be there. There'll be very significant focus on throughput over the next couple of years, and that just bodes very well. The other big part that a little bit of a dangling participle for us is the semiconductor business. So, we're a major supplier with KaiserSelect into that side of the business. And that business, which has doubled in the last five years, is expected to double again by 2030 by our end customers, their forecast, not ours. So, we're going to need the investments. It gives us great flexibility. If aero has a little lull, we pivot over easily over into the general engineering side. So, the investments will be in place, and I expect by the end of the decade, we'll be looking at additional investments.
I'm sure you'll see an AI slide in your future, you know?
Yeah. I almost highlighted the AI in Kaiser just to see if I could get a bump.
Yeah.
All right. Had I not got a Trump bump, I probably would have tried that.
Yeah. In our remaining minute or two, maybe just talk a little bit about net leverage, kind of targets there, where you think you are today, where you think you can get to during this whole period where obviously it's a huge margin expansion story that's going to happen.
Yeah. Yeah, huge. Again, the company we entered into COVID, we had about $1 billion of liquidity in place. Really allowed us to take advantage and the opportunity to get back into the packaging. We were probably the only strategic buyer at the time that was positioned to do that, and we executed on that. I talked to her. We have about $600 million in liquidity. But our net leverage really ramped up. So, when we looked at this, we thought within a few years on the average run rate, no other challenges, we'd get back to that 2-2.5 times. That's our ultimate target. We've been delayed on that. We got as high as 7-7.1 on that current. At the last earnings call, we were about 4.6.
I expect to see significant recovery and effort back to that 2-2.5 over the next two years.
Terrific. I'd normally say, "Email me if you have a question," but this isn't really working. But we got a lot of time for maybe one question if someone wants to, if someone's got a question. If not, then we'll wrap. Go ahead.
Can you share a bit about your manufacturing sites, how you source your energy or renewables versus wind? Do you have any onsite?
As far as having windmills or something onsite? Yeah. No, like a large facility. So, the two rolling mills really generate, take most of the energy requirements within our company. So, we recently had moved away from the site in Indiana. We were on a site where Alcoa still maintains a smelter and a power unit. That power unit is coal-fired. Okay. So, during the process of acquiring the rolling mill, we elected to move onto the grid on Indiana, which has many more opportunities for us to go after some green energy. We've completed that, okay, that process, another two and a half years to acquire. But we're on the grid now, and we're off of the coal, moving off of the coal-fired source. So, there, that's a positive sign we wanted to move that business to. We've actually moved significant more on the recycled side on that side.
The metal component, the input, is a significant part of our carbon footprint reduction. Okay. Moving to a lot more secondary and recycled material. Moved to the Northwest where our rolling mill is for the aerospace side, we're actually, so we had a history of, we'll hedge natural gas and electricity. Okay. We've been in a hydropower environment up in the Northwest, which has been strong, and that's good from that perspective. However, with a lot of the data centers and things that are moving up, especially in the Northwest, energy is starting to become a challenge. Energy is on our radar there as to what do we do on that part of the world. We felt we were in pretty good shape from a hydropower perspective, but those costs have also escalated pretty strongly, and they've been very volatile over the last couple of years.
We're working on alternative energy resourcing there. There are more than just one or two energy plays up there. That's currently under development work. We're also in that part of the world. We're working on the carbon reduction footprint and then water. Water is a huge environmental area that we're focused on because we're right on one of the rivers. Ultimately, you can't have any effluent going back into a river, and that's what we're focused on.
Terrific. Well, we're out of time, but thank you very much, Arment.
Thank you, Peter.