Prepared remarks
Greetings. Welcome to Kaiser Aluminum Corporation's Q2 2026 Earnings Conference Call. At this time, participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Kimberly 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 Keith A. Harvey and Executive Vice President and Chief Financial Officer Neal E. West. Before we begin, I would 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 31, 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 A. Harvey.
Thanks, Kimberly. Good morning, everyone, and thank you for joining us. I will begin on Slide 7. We are 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 have 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 the 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 have 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 from 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 plant spending, facility upgrades, and other projects that were less during the first half of the year and that 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 is now moving into 2027, as customer activity continues to build across many of our end market applications. Subsequently, we are seeing the benefits of the investments we have 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 has only increased. With that framework in mind, let me spend a few minutes discussing the key developments we are 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. Starting with Aerospace and High Strength, I would characterize the quarter as another step forward in the progression we have 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 are 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 end market or platform. While those trends support our confidence in the longer-term outlook, it is important to recognize that much of our capacity is already committed. We continue to expect results to trend toward the high end of our previously communicated range. The demand environment we are seeing today provides increasing confidence that these trends extend well beyond 2026. The investments we have made at our Trentwood operation were designed to support exactly this type of market environment, and we are now seeing growing utilization of that capacity across multiple ends. Our focus remains on execution, maximizing the value of the assets we have recently installed, and ensuring we are 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 Warwick 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, Warwick 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 mix 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 Warwick has been substantial, we have not yet fully optimized the assets or realized the complete benefit of the mix 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 and 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 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 with, 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 have discussed over the last several quarters — reshoring, domestic manufacturing investments, 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 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 have 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.
Thank you, Keith. Good morning, everyone. I will 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 in 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 the ongoing mix shift to our 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 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 — continued to hold up well among targeted buyers. Additional details on 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 pretax benefit of $4 million, adjusted net income for Q2 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 per 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 the 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 $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 passed 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 the 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 Q2 2026 our weighted average cost of metal inventory was approximately in line with the forward aluminum Midwest transaction price curve at $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 in the 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 totaled $24 million in Q2 2026, and for the full year, we continue to expect capital expenditures to be in a 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 to $628 million as of 06/30/2026. 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 Q2 2026, our net debt leverage ratio improved ahead of our expectations to 2.1x from 3.4x at year-end and is now in line with our targeted range of 2 to 2.5x. 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 will turn the call back over to Keith to discuss our outlook.
Thanks, Neal. Now turning to Slide 15. Taking all of this together, we continue to believe Kaiser is exceptionally well positioned. The investments we have made over the last several years were designed to capture exactly the type of market environment we are experiencing today, and we are 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 Warwick, 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 from 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% to 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 are happy to take your questions.
Questions and answers
Thank you. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the queue. Press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the numbers. Our first question is from Bill Peterson with JPMorgan. Please proceed.
Yes. Hi. Good morning, Keith and Neal. Nice job on the quarter, execution, and thanks for all the information. Considering the second quarter, I think it was 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 question. It is very broad-based. As we stated in a lot of our comments, we saw a lot of throughput through the operations. I called out that we spared no expense to meet that demand through the quarter and we allocated significant resources to meeting demand across the board. General engineering was a little surprise for us — stronger than we expected. We have talked for several quarters about nine-year lows in inventory levels, especially at service centers. They began to restock in force. As we predicted and have seen multiple times, they were not only buying for immediate demand, but also trying to refill inventories to meet rising demand. Coupled with aerospace coming back, the only way we could react to that was to increase throughput and move lead times out. As I stated, the surprise to us was how quick the recovery came and how fast we had to extend lead times because we are keeping a paramount focus on customer satisfaction during this period. The packaging numbers speak volumes. We are seeing really strong demand; it was likely driven in part by typical summer growth in our markets. While we are still going through qualification on Roll Coat 4, we are adding significant volume on the higher value-added side of the business as expected. Our automotive business — while we thought it would be flat given limited capacities — is seeing demand pick up, especially on trucks and SUVs, and we are working with customers to manage the work and satisfy that growth. So we had a really strong quarter. Moving into the balance of the year, we still expect continued performance improvements but we also have qualifications and some more issues to work out on the new line, which is why we are focused on that 80% utilization for the year. Overall, we are seeing strong demand across almost every market and product line, and we are ramping as fast as we can to meet those needs.
Yeah. Thanks for that color. Considering the second-half outlook, and given the context that the quarter was better across all segments, if you back into the shipment guidance, it would imply volume should trend down for the year. I'm trying to reconcile that relative to seasonality — is there some mix impact or planned downtime? And then on profitability, the EBITDA guidance implies margin pressure as well moving ahead. If you exclude metal lag effects, the margins are strong at over 30%. How should we reconcile the second-half guidance for both volume and EBITDA?
The way we tried to explain that in our numbers was by assuming that the metal tailwind we've had for the last several quarters normalizes. We are assuming metal becomes at par with the market. We put that assumption out because we really do not know if metal will continue to rise or drop. The big headwind actually occurred in June for us — metal moved down roughly $0.30 per pound very quickly, which took some air out of the sail for the quarter. So we are not assuming that metal tailwind moving forward. We also typically have more of our sales in the first half of the year — roughly 55% to 60% of total sales in the first half compared to the second half — and we brought that seasonality into our outlook. We paused some major maintenance in the quarter which we expect will be heavier in the second half. We need to keep these assets in good condition to meet rising demand, and we are rolling that into our outlook. We also will have fewer shipping days in the second half and planned outages and maintenance, which typically occur in the second half. So that is taking into account the first half deliveries we've already done and the expected second-half factors. On EBITDA deceleration, removing some of those metal tailwinds, I don't see a per-unit decrease necessarily. It will mainly be the metal component and the additional costs associated with maintenance and outages, plus fewer shipping days. Otherwise, demand is strong.
As I mentioned, we are into Q1 of 2027 on a number of our items, mainly related to plate products and aerospace and high-strength related products at this point.
That outlook continues to be robust and higher than we expected. As you can imagine, we are looking at how we can continue to excel. The expectation is we are resetting contracts for potentially better margin improvement beginning in the first part of the year. We expect demand to continue to rise in general engineering, which gives us an opportunity for margin growth. We have the ability to shift among aerospace, general engineering, and specific semiconductor-related products to pursue where margins are best. Other than the metal outlook and the planned higher spending in the second half, nothing has changed from what we've been seeing in the first part of the year.
Thanks, Bill.
Our next question is Samuel McKinney with KeyBanc Capital Markets. Please proceed.
Hey, good morning, guys, and congrats on a great quarter.
Thank you. What got better is that throughput is increasing, especially on the new roll coat line. All of our roll coat lines performed very well in the quarter, so we had strong output in Q2. We continued qualifications across the board with new customers and new coatings that we needed to qualify, and we've made great strides in that area. We still have some equipment issues to work through and some design items to refine, and that is what we expected for the year. From my perspective, I want to be at over 90% delivery performance, and we are starting to see delivery performance creep up. We had some weeks that were in excess of 70% and are improving. My goal is 90%, and we are on our way to attaining those levels. We are meeting the needs of our customers and the new contracts. When we discussed this strategy in 2024, we said we expected a 300 to 400 basis point improvement for the entire entity from the Warwick initiatives. We have achieved the bottom part of that range so far and are still working toward full utilization of the mill. I believe we are actually going to exceed that outlook from the strategy alone. I feel much more confident that the strategy is working, demand is increasing, and we are well positioned to take advantage of what we began when we made the acquisition at Warwick in 2021.
That is helpful. Within packaging, first-half conversion revenue was up almost 30% year over year. As you continue to increase that higher-value coated mix and improve product quality on the roll coat line, should we expect packaging conversion revenue to keep improving in the back half versus the number you posted in the second quarter?
No. There is no reason to think it will not continue to improve.
Thank you. There are no further questions at this time. I would like to turn the call back over to Keith A. Harvey for closing remarks.
Thank you all for your time and interest in Kaiser Aluminum today. The men and women of this storied company worked very hard to successfully execute what has been a long, consistent, and winning strategy for our company. For that, I am 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.