Alcoa Warrick LLC (KALU) Earnings Call Transcript & Summary

Welcome to the Kaiser Aluminum conference call to discuss the company's agreement to purchase Alcoa Warrick LLC. My name is Vanesse, and I'll be your operator for today's call. [Operator Instructions] I would now like to turn the call over to Melinda Ellsworth for introductions. Melinda, you may begin.

Thank you, and good morning, everyone, and welcome to Kaiser Aluminum's conference call to discuss our anticipated acquisition of Alcoa Warrick LLC. If you've not seen a copy of our news release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are President and Chief Executive Officer, Keith Harvey; Senior Vice President and Chief Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey. Before we begin, I'd like to refer you to the first 3 slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company's Form 8-K 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, 2019, and Form 10-Qs for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the appendix of the presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes nonrun rate items for which we've provided reconciliations in the appendix. At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Keith Harvey. Keith?

Thank you, Melinda, and thank you for joining us on the call today to discuss our anticipated acquisition of Alcoa Warrick LLC. As announced, we have entered into a definitive agreement to purchase the Warrick Rolling Mill and related operations for a purchase price of $670 million or approximately 7x adjusted EBITDA for the trailing 12 months ended September 30, 2020. As noted in our news release, Alcoa will retain the related smelting assets, power plant and land. Also as noted, as part of the transaction, we will enter into a market-based molten aluminum supply agreement and a long-term ground lease that includes provisions for utility services and a customary transition services agreement. Warrick is a leading producer of can stock for the attractive and growing North American aluminum beverage and food packaging market. It has a solid market position supported by multiyear contracts with metal pass-through provisions and strong, long-standing customer relationships. Led by a strong, culturally compatible management team, Warrick is a bolt-on to our existing portfolio with minimal operational integration risk. The anticipated acquisition significantly increases Kaiser's scale and provides excellent opportunities for long-term growth and synergy with our existing operations. The noncyclic packaging business is highly complementary to our existing aerospace, automotive and general engineering end markets. Overall, the acquisition is consistent with our long-standing capital allocation priorities and our approach to inorganic growth opportunities in that it's a business we understand, it is being acquired at a price that creates long-term value for our stakeholders, while enabling us to continue to adhere to our disciplined conservative strategy for liquidity management and debt leverage. We intend to fund the purchase price with $587 million of cash on hand and the assumption of $83 million of other post-employment benefits liabilities. The transaction is anticipated to close at the end of the first quarter 2021 and will be immediately accretive to earnings and will provide a positive cash flow. We will continue to maintain a conservative balance sheet, and we have a clear path to reduce net debt leverage to below 2x by the end of 2023. Turning to Slide 5. As I noted earlier, Warrick is a leading producer of can stock for the beverage and food packaging industry and is one of 4 major aluminum rolling mills currently dedicated to the packaging industry in North America. The facility includes casting, significant hot and cold rolling capacity, and a range of finishing and coating capability. The mill produces multiple coated products for food can, end stock, can body stock, bottle, tab and closure stock. Of Warrick's total last 12 months shipments, approximately 60% represented high-margin coated packaging products. Warrick employees, approximately 1,200 employees, of which approximately 900 of the employees are represented by the United Steelworkers of America. People are the strength of any company's success, and we've been very impressed with the safe, hard-working, winning attitude of the employees at the Warrick facility, and we believe the 2 organizations will blend well together. We look forward to welcoming the Warrick team to Kaiser Aluminum. Turning to Slide 6. The acquisition provides the opportunity to significantly enhance and diversify our portfolio with entry into the North American beverage and food packaging end markets with strong demand growth driven by sustainability trends and the secular shift from plastic to aluminum in the packaging industry. Additionally, industry can stock capacity for beverage and food packaging has shifted to other end markets, resulting in very favorable supply and demand dynamics. Warrick's solid market position is supported by multiyear contracts with a blue-chip customer base that generates predictable earnings and a very stable cash flow due to the noncyclic nature of the packaging business. The addition of Warrick significantly increases Kaiser's scale and serves to further enhance our financial strength and flexibility. Turning to Slide 7. The strong secular demand growth for aluminum can stock products, as we mentioned before, is driven by sustainability trends and the shift from plastic to aluminum in the packaging industry. Growing consumer preference for specialty beverages, combined with the allocation of can stock capacity to other end markets has created favorable industry dynamics and the supply deficit is expected to continue well into the decade. Moving on to Slide 8 and a pro forma analysis of Kaiser's last 12 months value-added revenue, including Warrick. The addition of Warrick provides a fourth platform for secular growth, adds scale and diversifies the end market mix and reduces the cyclicality of the product portfolio. Turning to Slide 9. And using the last 12 months pro forma data, the Warrick acquisition will increase Kaiser Aluminum's value-added revenue by approximately 67% and adjusted EBITDA by approximately 53%. The benefits of scale will further create value as we leverage our combined operations to achieve efficiencies over the longer term. Turning to Slide 10. As I previously noted, we intend to fund the transaction with cash on hand and the assumption of certain liabilities. We remain committed to both our long-standing capital allocation priorities and our conservative financial guidelines to continue to manage the business with financial strength and flexibility and to remain strong through the cycles. With the stability of Warrick's earnings and cash flow, we expect pro forma net debt leverage will decline to below 2x by the end of 2023. Moving on to Slide 11 and our summary comments. The acquisition of Alcoa Warrick LLC is very consistent with our approach to opportunistic inorganic growth and creates a strong, diversified and less-cyclic portfolio from which to continue to drive long-term growth and profitability for our shareholders. We look forward to closing the transaction toward the end of the first quarter in 2021, and welcome the Warrick employees to the Kaiser Aluminum family. With that, I will now open the call for questions.

[Operator Instructions] Our first question comes from Josh Sullivan from Benchmark Co.

Congratulations on the acquisition here. Just if we look at the phased investments, you've done at Trentwood over the years, you guys have had a lot of success optimizing operations rather than building new greenfield. Can you talk about what you see at Warrick? Any obvious lessons learned from what you've done at Trentwood, where you maybe can immediately do at Warrick? Or just what you're looking at there?

Well, Josh, we really like the Warrick operation and the management team there. And as you stated, our focus has been on organic growth, which has been one of the priorities in our capital allocation priorities. We continue to see that, and we'll continue to focus on that continued growth within Trentwood and all the facilities. As it relates to Warrick, we've also always stated that the second priority with capital allocation for us is inorganic growth. And as we've also stated during the cycles, we continue to be on the outlook for great opportunities in businesses that we know, businesses that we think have a winning opportunity, a strong management and the opportunity to continue to expand that growth with additional organic investments. Warrick happened to check all those boxes for us. And as we get forward, looking forward, after the closing, during the diligence process, we were able to identify numerous opportunities to continue that organic growth at Warrick, and we'll do so as time and demand allows for that. So this really is consistent with our priorities to capital and investments and inorganic growth. So we're just very pleased with this opportunity and with the Warrick facility.

Got it. And then just one on the industry shift from plastic to aluminum. And obviously, COVID, with the stay-at-home dynamic. But just curious, are they seeing customers signing up for capacity commitments, specifically for the water conversion at this point? Are you seeing that demand directly?

Well, we have had discussions in the past, and we have followed the industry for quite some time. And many -- most people know Kaiser Aluminum was in the packaging industry for many, many years, in the '80s and '90s and so forth. So we understand that market. We know some of the players. But our understanding is that, that growth is -- has not only been in specialized types of drinks, but water has also been spoken of, of moving from products which are the plastics to the aluminum containers. So we are aware of the industry supply-demand dynamics there. And we think that this fits the bill that we look at in our company as we continue to grow with these secular growth markets. We've done that in aerospace, general engineering. We've invested in the automotive side, and now we get the opportunity to participate in the packaging growth that we expect to continue on into the decade.

Got it. And then just one last one. With this acquisition, how comfortable are you pursuing other M&A at this point in some of your other verticals? How much more leverage would you be willing to go up to if the right opportunity came along? Or do you think you guys are pretty conservative at this point?

Well, we're a conservative company by nature, Josh, as you well know. But again, when we see a great opportunity, and we see strong and it being accretive immediately and the type of things that work offers us, good thing for us, we're in a strong position to be able to participate. And as we've discussed, we still have ample liquidity on the balance sheet as we move forward. So we'll continue to keep our eyes open for opportunities if they exist. Meanwhile, organic opportunities will continue to get some preference in our company. In the markets that we serve, luckily, we're seeing a significant number of opportunities to continue to expand. But if things continue and with access to additional liquidity in the company, we're well positioned to further enact additional acquisitions if they come in as nice as the Warrick opportunity has allowed for us. So we have a lot of flexibility in our path forward.

There are no further questions at this time.

Okay. Well, thank you very much, everyone. We appreciate you joining us on the call today. We look forward to providing further updates during our fourth quarter 2020 conference call in February. Have a good day.

Thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.