Greetings, and welcome to the Kaiser Aluminum Corporation Fourth Quarter and Full Year 2022 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce your host, Kim Orlando, with Addo Investment Relations. Thank you. You may begin.

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's Fourth Quarter and Full Year 2022 Earnings Conference Call. If you have not seen a copy of our earnings release, please visit the Investor Relations page of our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are President and Chief Executive Officer, Keith Harvey; Executive 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 the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Commission, including the company's annual report on Form 10-K for the full year ended December 31, 2022, which will be filed later today, February 23, 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. 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 in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items for which we have 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?

Thanks, Kim, and thank you all for joining us for a review of our fourth quarter and full year 2022 results. Turning to Slide 6. Before we begin today, I wanted to remind everyone of our recently announced change to the presentation of our adjusted EBITDA to discontinue the use of adjustments to plant level LIFO and the consequential impact on certain other non-GAAP measures. Please refer to our press release issued on January 26, 2023, as well as our earnings press release and supplemental slide presentation for further details on this matter. While 2022 was a highly challenging year for Kaiser amid unprecedented supply chain disruptions and ongoing inflationary cost pressures, we made remarkable progress to position the business for success. Beginning first with our results. As anticipated, the challenges at our packaging operations at Warrick continue to weigh on our performance in the fourth quarter. Adjusted EBITDA in the fourth quarter was relatively consistent with the prior quarter at approximately $30 million, primarily reflecting headwinds associated with our ability to increase prices to recover higher commodity and input costs, coupled with lower packaging shipments as we experienced some destocking, primarily by beverage customers at the end of the year. For the full year, adjusted EBITDA declined to $142 million due mainly to significant supply chain disruptions at Warrick that have since been resolved. Additionally, a compression in market-driven scrap discounts negatively impacted both the fourth quarter and second half of the year in 2022. In an effort to minimize the impact on our customers due to ongoing supply disruptions we experienced last year, we purchased metal in the second half of 2022 at a higher cost, which led to a metal inventory imbalance due to lower scrap utilization. We estimate incremental cost in the fourth quarter of $19…

Thank you, Keith, and good morning, everyone. Before I discuss our full year and fourth quarter 2022 results, as Keith highlighted, I want to remind everyone of our January 26, 2023 press release, where we announced changes to the presentation of certain non-GAAP financial measures following discussions with the Securities and Exchange Commission staff. Part of our discussion with the SEC staff, we renamed value-added revenue, or VAR, to conversion revenue and revised our presentation of adjusted EBITDA, adjusted operating income, adjusted net income and adjusted EPS to discontinue the use of non-run rate adjustment item, identified as adjustment to plant-level LIFO. Separately, we revised our calculation for hedge costs of alloyed metal effective for the full year ended December 31, 2022. Please refer to the January announcement, our earnings release and slide presentation for additional details. Now let's turn to Slide 10. For the full year 2022, conversion revenue was $1.4 billion. Note that the impact of the changes we instituted beginning in 2022 to more fully reflect contained metal pass-through in our hedge cost of alloyed metal in comparison to our historical presentation conversion revenue resulted in roughly $112 million conversion revenue reduction in 2022. Turning to Slide 11 and reviewing our conversion revenue by end market. Aero high-strength conversion revenue totaled $103 million in the fourth quarter of 2022 after an $8 million adjustment for incremental alloyed metal, reflecting a 25% improvement on a 28% increase in shipments over the prior year quarter. Growth in shipments was driven by improving demand for commercial aerospace applications in addition to strong plate shipments following our third quarter plant outage at our Trentwood facility. For the full year 2022, aero high-strength conversion revenue totaled $356 million, up 13% over the prior year, after a $32 million adjustment for alloyed metals,…

Thanks, Neal. Now I'll turn to our outlook for the first quarter of 2023. eginning with aerospace on Slide 20. We expect continued strong momentum for aero and high-strength shipments in the first quarter, with shipments sequentially approximately 5% higher in the first quarter versus the fourth quarter of 2022. And conversion revenue improving by 5% to 10% in the same period as the recovery continues in commercial aerospace towards pre-pandemic levels, which we believe should be attainable by the year-end 2024. Rate increases for single aisle and wide-body jets are being planned for this year as supply chains improve, airline passenger miles continue to increase and declarations by the air framers support a stronger 2023. The demand for business jet production remains strong and the backlog for business jet remains robust, with production increases set to grow each year over the next several years. Defense has been holding strong and is expected to continue as a result of increasing demand for the F-35 and other legacy platforms, which Kaiser is well positioned to support. Following the upgrades at our Trentwood mill and competitive position of our other facilities servicing the aerospace and high strength end markets, we remain bullish on our ability to service the incremental demand expected in the first quarter and beyond. Turning now to Slide 21, in packaging. With the most significant supply chain challenges experienced in 2022 at our Warrick rolling mill now behind us, we anticipate a return to more normalized operations in 2023 and albeit with some lingering impacts of higher metal costs and a continued lag in price adjustments to fully pass through certain costs with 1 or 2 existing contracts. We expect continued destocking with some customers in the first quarter with those orders being moved into the balance of 2023.…

[Operator Instructions]. Our first question comes from the line of Timna Tanners with Wolfe Research.

I'm trying to get a handle on kind of the factors in 2023 that keep you from achieving the ultimate EBITDA margin goal. So just trying to go through one by one, one being packaging/destocking, which, I think, is supposed to abate. I'd just like a little bit more color on that. The other being any lingering issues with supply chain and some end markets? But could you try to go through and provide us a little bit more color on the things that are keeping you from achieving the EBITDA margin goal? And how you expect to -- some of the plans to kind of progress through those challenges?

Sure. I appreciate your question. So let's start with Warrick. So obviously, we had a -- as we've identified about $73 million of incremental costs that hit us in 2022, we can -- looking at those costs and moving forward in '23, we believe 60% to 70% of those costs are not going to reoccur. So that's behind us, and we wouldn't expect it to happen in '23. Remainder of those costs, we expect that to continue to abate as we go through the next several quarters because we pass through some lagging cost associated with alloys, and we rebalanced and normalized our inventories. We brought in a lot of inventory last year through that force majeure period to make sure that our customers weren't disadvantaged. And we'll be smoothing out that over the next several quarters. The second thing is that we've got a more stable operation now at the Warrick facility. All those disruptions last year created tremendous inefficiencies in the operations. And we're starting to see those settle down and resume back to more normal rates. Those will occur as we go throughout the year, but we expect those to continue to improve. And so we'll have a high focus on that and on cost reduction. On cost production, we anticipate producing $8 million to $10 million through the year on cost reduction. And that's an area that we're going to focus on. And as we get more efficient, we believe we'll be able to pull that out. Our -- if you look at our contract discussions that we've had, especially around packaging, we've continued to have improved mix, pricing, improve the pass-through conditions on all our current contracts. And if you look back over the last several 4 to 5 quarters, you'll see that we've been improving those sales margins by roughly 20% and above. So we're getting those additional prices, improve MAX through. It's really been an issue around these costs that we've experienced, okay? And so that focus is really our area. And you talked about -- another part of your question was around the destocking and what we expected to occur. We think that those -- I don't know if transitory destocking is a word to use, but we believe that it's a short-term phenomena. There was a lot of material in the inventory and there were some consumer habit changes that have taken place. Our customers, basically, feel that, that's being moved back to the end of the year. First quarter is generally one of the slowest quarters from a packaging perspective. So we expect to heat up back into the second and to the third quarter to be quite strong and back to the levels that we experienced in the first quarter of last year. So that's our outlook. We think if the market continues to hold still, we've got good conditions in place, relatively good pricing increases and stabilization of operations will help us start getting our cost.

That's really helpful. So could we assume that if you see the sequential improvement that you described and for the reasons that you just gave, could you be closer to that targeted EBITDA margin exit 2023?

Well, I look at it this way, Timna. If I take a look at what happened to us in 2022, and we had some gut checks last year, no question. but we delivered $142 million of EBITDA. If you roll back in that $73 million of incremental cost, and then if you look at this LIFO impact adjustment that we made, which was roughly a $22 million impact to EBITDA for the year, this business would have delivered roughly $237 million EBITDA which would equate to roughly a 17% margin. And at the beginning of last year, we anticipated the business before we knew all this was in front of us that our -- this business was going to deliver a 17% to 20% margin. So I think we're on the right track. We just had a number of those unique things impacting us. The uncertainty with '23, obviously, is whether there's going to be a hard landing versus a soft landing on any type of recession. And we've seen a slight slowdown in the first quarter as we've identified, but not uncertain as to what the rest of the year looks like. And so as we go forward, as we mentioned in our prepared statement, we felt -- we feel Q4 was really the trough where we are. We're digging back out of this. And as the year progresses, if it progresses as we expect, we expect to continually improve back to our historic margins.

Okay. Helpful. If I could squeeze one last one in. Can you provide any further detail on the mentioned lawsuit against U.S. MAG and your insurance recovery potential there?

Really can't make any comments, Timna, while that's underway. That's in -- the starting up right now. We expect toward the end of the year to have some more definitive explanation for that. But certainly, we felt that there were damages that the force majeure was not under accepted conditions, and it impacted our company. And we're going to fight to recover those damages.

Our next question comes from the line of Emily Chieng with Goldman Sachs.

My first question is just around the Warrick roll mill -- roll coat line that you're building right now. As you think about that coming online, just any thoughts around supply chain issues that may impact the time line of when that does come online? And then secondly, ahead of that starting to -- that starting up. Do you need to take time off-line at Warrick to have that installed and commissioned?

Emily, thanks for your question. So the Warrick roll coat line is anything, inflationary and timing on any of these things have been quite challenging. But for now, we're on track on timing. Inflationary costs, as you can imagine, price of steel and other of those things have continued to push some upward pressure on the budgets, but those are within the realm that we expected. Timing is to have the equipment. As I mentioned, the building is erected, the equipment is beginning to come in, and we're on expectation to have that in place in some time early in 2024. If you were to see the layout of our operation, Emily, it's completely segregated against all the other operations. So there should be no impact to any of the day-to-day operations in place as they stand. We have a qualification plan to get us there, fully operational and ready to begin supply by mid- to late 2024. So we expect that is to all in online. And as a reminder on that, the reason we're so excited about that influx, so there's two areas to look at for Warrick. One is on those costs, and we saw what could happen to us in 2022. And we're quickly looking to adjust those and get those in perspective. But on the second part is the top line growth for that business. And as we've mentioned before this investment, once delivered, is going to allow us to improve margins on coated products versus non-coated greater than 3x. So that's a significant enhancement for us, and that will be on roughly 25% of the existing capacity. Any significant amount of that money is already -- the volume is under contract. So we're very excited to get that in place. We think that's going to have significant impact to our earnings and not only for the shorter term, but through the end of the decade. So that's our current situation, and things remain on track there.

Great. And then a follow-up. I'd just love to hear a little bit more color around sort of your contract discussions, and maybe if there's been any incremental progress made on getting improved pricing and pass-throughs on a couple of these different cost items there. What has progressed since the last quarter update? And then how do you think about what the components are that we should embed into this new hedged cost of alloyed metals? What are the alloys there specifically that we should start tracking more closely?

Yes. So we're -- so on the contract negotiations, those have continued to go very well, Emily. We're seeing improved pricing even on existing contracts, as we started -- we purchased in 2021, and we saw some even in the current shorter-term contracts, we saw opportunities for improvement. And indeed, we've seen over 20% on conversion revenue per pound increases over the last 5 quarters. And then as we look further out, we're seeing improved mix. We're seeing improved pricing opportunities. We're looking at inflationary pass-throughs to help us negate some of the challenges that impacted us in 2022 and expected this year. So I would say that the environment there for improvement and pass-throughs and better mixes and the ability for us to do what we do in our businesses and go after high margins and niche areas with very low-cost operations are intact. So we're very pleased about the progress there. Now the challenge that we identified in 2022, we made great progress with customers in really how we look at moving these costs through our system on a -- generally, these are done on an annual basis. And we've done some things with our customers to help us look at those quarterly impacts and moving those costs forward on a quicker basis. But even more importantly, we've identified a lot more of these commodity pass-throughs. And then our discovery of a number of these, especially through those high commodity increases, we found a couple of disconnects with a couple of our contracts where we're not passing through the entire cost of things such as magnesium. And we're working with customers to really make those adjustments and get those back in line with where the remainder of our contracts are. So that's a little bit of the lag that we're talking about. And then when you get to the point of what alloys are we looking at? What are we -- we're looking at everything. I mean we're looking at all alloys. So magnesium, obviously being on the top of the list, but we follow metal prices for aluminum. We're following manganese. We're following copper for our other products, other product lines, copper and all of those. We're looking at energy. We're looking at also our metal input cost. So one of the large impacts to us, as we called out, especially in the second half of the year, because of those supply disruptions, it really got us off of our game in bringing in the right types of materials, such as more scrap and lower-cost units and forced us into some higher costs, which we paid the price for. And -- but our go-forward is that we'll have a much better handle on managing those costs as we move forward those input costs, which will affect the

That is all the time we have for questions. I'd like to hand it back to Mr. Keith Harvey for closing remarks.

Okay. Well, thank you for joining us today. We look forward to returning to a more normalized operating conditions with stronger profitable growth in 2023. And I look forward to updating you on your progress in April. Have a great day.

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