Good day and welcome to the Kaiser Aluminum Second Quarter 2012 Earnings Conference Call. Today's call is being recorded. At this time, I'd like to turn the conference over to Ms. Melinda Ellsworth, Vice President and Treasurer. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's Second Quarter 2012 Earnings Conference Call. If you have not seen a copy of today's 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 Officer, Jack Hockema; Executive Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neal West. 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 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, 2011 and current report on Form 8-K filed on May 24, 2012. 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 and reconciliations to the most comparable GAAP financial measures are also included in the earnings release and in the appendix of the 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 Jack Hockema. Jack?

Thanks, Melinda and welcome to everyone joining us on the call today. We are pleased with the second quarter results which combined with the first quarter have produced record-breaking first half sales and earnings results. Key drivers for the strong results were strong underlying aerospace and automotive demand and steadily improving pricing, including benefits from lower contained metal costs on high value-added products. In addition, we have solid execution on our plants especially at Trentwood, which operated around planned equipment outages related to the Phase 4 heat treat plate expansion project. We continue to benefit from more than $400 million of investments made over the past few years to increase capacity, improve the efficiency and quality and expand our product offering. And our record results over the last 6 months and 12-month periods that demonstrate meaningful progress toward the long-term potential of our platform. Turning to Slide 6, our near-term outlook remains positive. We expect strong aerospace and automotive demand to continue in the second half of 2012 and in 2013. We are beginning to gain visibility in the next year for aerospace plate and we foresee requirements that are likely to fully utilize Trentwood's plate capacity next year, including the Phase 4 expansion. In addition, we have financial flexibility that will enable us to capitalize on expansion opportunities presented by growing aerospace and automotive markets and to enhance our platform through value creating acquisitions. Now turning to slide 7, Dan will provide further insight into the second quarter and first half results.

Thanks, Jack. Value-added revenue through the first half of 2012 was up significantly relative to the comparable period in 2011 driven by strong demand for aerospace and automotive products. Sequentially, value-added revenue declined by 1% in the second quarter consistent with our expectations and primarily due to planned equipment outages at our Trentwood facility related to our Phase 4 heat treat plate expansion, which we discussed in our first quarter earnings call. As we look at each of our end market applications, aerospace and high strength value-added revenue improved substantially in 2012 relative to the comparable 2011 periods, up 27% in the second quarter and up 31% in the first half of 2012. These year-over-year improvements significantly exceeded commercial aircraft build rates. Strong demand and solid execution in our facilities drove higher shipments and greater use of our capacity additions, particularly for aerospace plate. Additionally, we are benefiting from a more favorable pricing environment and lower contained metal costs. Value-added revenue for automotive extrusions also showed a step-up with the second quarter and the first half of 2012 increasing 12% and 17% respectively compared to the prior year periods. These improvements reflect higher North American automotive build rates and continued penetration of aluminum extrusion content on new and existing automotive platforms. We are also seeing improved pricing on certain products in automotive in 2012. Value-added revenue for general engineering was up approximately 5% for the second quarter and 7% for the first half of 2012 compared to the 2011 periods, primarily due to improved pricing on certain products and lower contained metal costs. Demand remained lackluster, however, reflecting the slowly growing North American industrial economy. Further detail on value-added revenue, which represents our net sales minus the hedged cost of alloyed metal can be found in the appendix on Slides…

Thanks, Dan. Turning to Slide 10 in our outlook for aerospace and high strength applications, we expect continuing strong aerospace demand in the second half driven by steadily increasing build rates. However, we also expect normal seasonal weakness for service center aerospace on high strength applications in the second half. As mentioned in my opening remarks, the outlook for 2013 aerospace demand continues to be very positive and we expect that our order book will fully utilize our heat treat plate capacity, including the Phase 4 expansion, in 2013. Beyond 2013, we remain optimistic of our prospects for aerospace applications and we continue to evaluate market and customer needs to determine if and when additional heat treat plate capacity is required beyond the Phase 4 expansion that will be online by the end of this year Turning to Slide 11 and automotive, the build rate forecast for 2012 was approximately 15 million vehicles, up almost 15% from the prior year. We expect normal seasonal underlying demand weakness in the second half of this year driven by seasonally lower build rates, but this should be partially offset by our shipments for new programs launching in the second half. Our long-term outlook for automotive is very bright with prospects for steadily increasing build rates and aluminum extrusion content driven by light weighting initiatives to achieve improved fuel efficiency. Turning to Slide 12, the outlook for general industrial applications remains tempered given the macroeconomic headwinds and the U.S. economy is still burdened by a very weak recovery for manufacturing. Ongoing global and U.S. economic uncertainty clouds our visibility for these applications in the second half and beyond. The order pattern this year for our industrial applications is similar to last year when we saw strong first quarter demand and restocking followed by a…

[Operator Instructions] And first question will come from Dave Katz with JPMorgan.

I had 2 follow up questions, one I thought you were saying that there might be an additional ability to do heat treat expansion and post Phase 4, was that correct?

That is correct. We have on the shelf phases 5, 6 and 7. And in my remarks I alluded to it, but we continue to monitor customer needs and our outlook for the market to determine if and when it's appropriate to pull the trigger on any of those expansions.

And if we look at that first one Phase 5 by how much will that expand capacity by and how long would it take before that could be put in place?

They -- all 3 phases vary, but there are order magnitudes similar to Phase 4 and that 5% to 10% increasing total heat treat plate capacity. And all of them are order of magnitude 1.5 to 2 years timeframe to bring them online.

Okay. And then on the EBITDA margin, I thought you had said that -- I want to make sure the timeline you said second half of 2012. Your thoughts right now or that the margin maybe down 3 to 4 points compared to first half of '12 and that's EBITDA margin on the value added revenue correct?

Yes, its EBITDA margin on value-added revenue. And to be specific I mean there are other factors involved, but 2 clear factors. One is we expect seasonally lower volume which typically happens every year unless it's a really booming market. And the second as we have higher planned major maintenance expense in the second half which is also usually typical. So the combination of those, roughly 5% lower value-added revenue which is less operating leverage and some higher planned major maintenance expense could have impact of 3 or 4 points.

Next will be Steve Levenson with Stifel Nicolaus.

Is there sort of target normalized incremental operating margin or EBITDA margin on value-added revenue because obviously right now the number is pretty big, but there are some significant changes in the demand picture and then in what you're doing in the factories. So I'm just trying to think longer term about what to use?

Yes, well. Good question. Dan had some numbers in his remarks there, but if you look at the first half of this year which factors out some of the quarter-to-quarter noise, it was in the 23.5% to 24% range or less than 24%. In the last 12 months I think it's trending around 21% for the last 12 months. And we said we expect to see some degradation in the second half with less leverage and higher major maintenance expenses. So we are in the low-20s now, but what we've been saying consistently for the past 1 year-1.5 years is that when we get to normal economy which were not yet certainly in terms of the U.S. industrial economy and even in auto builds, when we get to normal economy we have the potential for value-added revenues well about $800 million on a annualized basis and margins well into the 20s and obviously we're in the 20s already, but operating leverage as a big impact. So well into 20s is well above where we've been in the last 20 months.

Okay. Now one of the questions I get from a lot of people that I talk to are, "Gee, you've got an awful lot of cash, it's a little bit scary, what are you going to use it for?" So I don't know if you're looking to add more things horizontally or looking to go downstream. I know there have been number of recent acquisitions of companies that do precision machining. And I'm just curious if you had some comments on that?

Well, we look in all directions, but primarily we look for bolt-on type opportunities and we primarily look for U.S. income because of the NOLs that we have. So those are 2 factors, but the primary factor is we work for businesses we understand that are complementary to our platform and where we have a clear vision of how we create value for the shareholders. But most likely, their acquisition is similar to the things that we have done in the past that have been complementary products that expanded our product offering in businesses and markets that we understand.

Moving on to Mark Parr with KeyBanc.

I had one question in particular -- it looks like the automotive extrusion growth was a lot less than underlying U.S. vehicle production growth. I was wondering if you could help me reconcile the difference in the growth trajectory of the automotive business relative to the industry.

That's a really good question. You get some time to dig already this morning. As such, you had enough calls you would be distracted.

Well, I just put it this way -- I just bring in lots of extra shovels on these weeks.

Now that is a good question and there is an answer for it. Most of our applications were consistent with the build rates. The applications spread across all platforms, for example, anti-lock brake systems, but some of our other applications like drive shaft tubing, and in particular in this case, bumpers are on specific platforms. And in fact some of the bumper platforms were actually transitioning on models. So then you may not have picked it up in our remarks, but I indicated in my remarks in the outlook that we would see seasonal pressure in the second half on automotive, because build rates are down 10% or so, but that would be offset by new launches. So some of the platforms that we are converting over to new models in the first half that depressed our automotive a little bit will give us a boost counter to seasonality in the second half. It's really model changer over some specific programs that we are on.

Okay, all right. That's helpful. Another question if I could ask another, just would like to get an update on progress with the monolithic design and what sort of growth trajectory you expect for that particular piece of the aluminum plate market in the second half and in 2013?

Well, I don't know this is going to have that significant an impact on the second half or even 2013, but from a qualitative standpoint, what I'll say is that every year when we update our outlook in terms of the utilization of our product per airframe that's being built, it gets boosted on virtually every airframe in the entire system, because there are more and more conversions to monolithic. So while it's not nearly the pace that it was 6 or 8 years ago, when they were converting everything over, we continue to see significant conversions every year of more and more monolithic designs. So that's a nice strong underlying driver, but still the key driver for us is the build rates that we have seen and the larger aircraft that they are building, longer and wider aircraft.

Moving on to Timna Tanners with Bank of America-Merrill Lynch.

One or 2 follow-ups, because we caught something, I think in the Q where you talked about removing the restrictions on the VEBA on stock sales. I was hoping you could clarify if you know that, that happened or is that -- is it looks like it was granted on June 19. And if that indeed means that the Union would have been able to sell off all of its remaining shares it's held with that they had held?

Yes, Timna, we did -- the board looked at this and it was really driven around what the impact it may have on our NOL protection and we decided it wasn't necessary any longer to have the VEBA restricted, so the board granted them the permission or removed the restriction better said for them to sell the remaining shares. And it was in June. What has happened since then with regard to the sales of shares, we don't have visibility to.

Okay. And then I just was wondering if you could talk a little bit about how we are hearing that the aluminum market is really tight, how is that affecting you at all in getting ingots? How are you passing on the Midwest premium? And along those same lines, if there were a change in the Midwest Premium, how would we see that manifest itself in your earnings?

In relation to the premium, virtually all of our contractual metal pass-through are based on Midwest price, so we don't pass through LME, we pass through Midwest. And even when we do firm prices going forward we do the same thing, it's based on the Midwest price. So we expect to recover the premium irrespective of what it is. From a supply standpoint we have good, strong, secured supplier relationships with all the big suppliers and we are a very big good customer to them. So we don't have any significant supply concerns contrary to maybe what some smaller people are saying.

Okay, that's helpful and if I could just one last one. There seems to be a lot of announcements still of new downstream capacity being developed. And I was just wondering, more on the long product the rod side, not so much on the plate side, how you are seeing the competitive environment there?

You are talking specifically rod and bar.

Yes, that's right.

I am not aware of any significant downstream expansions in rod and bar at least amongst the 3 major suppliers of soft alloy rod and bar products. And the other factor -- Kalamazoo being one big factor and Kaiser select another, but the bar continues to be raised there in terms of the requirements for the marketplace. So we are not seeing a significant issue or an issue of any kind in terms of excess over capacity from new capacity coming on stream -- legitimate capacity coming on stream, it's a more function of the very weak industrial economy. But pricing has been stable and is pretty much what I would characterize is normal rates today.

The next question will come from Lloyd O'Carroll with Davenport & Company.

You said that your capacity at Trentwood was restricted because of Phase 4, when will Phase 4 be completed so as to make the entire capacity available to you?

It's really -- the impact will be in 2013 here, we may get a little right at the tail end of the year, but it's really a 2013 impact.

Well sometime in the first half?

Oh no, we will be pretty much on stream by the end of the year, so we expect we will have at almost day one in 2013.

Your next question comes from Ed Marshall with Sidoti & Company.

Most of the questions have been answered. But I am curious, the capacity increases under Phase 4 would you expect to hit in 2013. What effect if any do you think will have on the pricing based on -- I think you said that the capacity will be fully utilized in 2013. But just curious to think what your impact on pricing will be if you add additional capacity?

Well, we are certainly adding capacity that required by demand witnessed the fact that we're going to have it sold out. So us adding that capacity will have no negative impact on market prices if that's your question.

Yes, okay. And then the customer psychology, I guess -- I mean generally in raising pricing environments they tend to over buy, do you think that is scenario that you are seeing right now -- there is a little bit of over supply. I mean it looks like you are outpacing the aerospace kind of demand drivers anyway.

Yes, I think the underlying reason for us outpacing the build rates is that we have the inventory over hang in play. So we really didn't see plate start to pick up. And if you go back and look at our trends, you will see it really picked up strongly in the second half of last year and the first half was still relatively anemic. So it's more the plate over hang and we see it in our other products. We saw our extrusions and rod and bar and our drawn tube aerospace pick up much sooner than the plate did. Some of that is lag time in getting the products into the airframes being built, but most of it was just recovering from that big plate inventory over hang.

And you mentioned a few major maintenance outages in the second half of the year? Are they part of the Phase 4 expansion, are they in aerospace?

No, most of it is routine planned maintenance typically as primarily furnish rebuilds and there may be a little bit related to Phase 4, but most of the -- there are no significant equipment outages that will impact our throughput in the second half. These are normally schedule when there are the seasonality, which means customers are taking shutdown. So we get weak July and weak November and December demand because of shorter work weeks. So we do more maintenance during those periods.

Tough question to answer, I don't mean to put you on the spot, but you think it's pre-buys that you are seeing right now -- customers are preparing for the maintenance schedules or…

No, no, they're transparent to the customers, they won't even know that we did any of these things.

[Operator Instructions] Next question comes from Tim Hayes with Davenport and Company.

The first question on the price increase, the $0.03 price increase on rod and bar products that was think of 2 of the customers put in place -- or not customers, competitors put in place month or so ago, I'm assuming you guys went along with that. Did that $0.03 stick in full?

Yes, the prices are sticking.

Any likelihood of another increase? You keep watching this billet premium keep climbing and maybe others might be compelled to raise prices to cover that billet premium.

It could be although, the counter factor here is now we are into the seasonal period and we continue to see weakness in the industrial economy here. But we don't see any degradation in pricing, I'm not sure that we will see any significant movement in rod and bar in the short-term.

Okay, and then out of your total extrusions, what percentage is rod and bar say versus just all other extruded shapes?

Well, there, what we break out you can see automotive so, automotive is one big factor and then we have rod and bar, which is another significant factor. It's probably more than 50% of our total extrusion volume even including automotive, and then the rest of the volume is primarily tubing type product so.

And then final just to clarify on the guidance for the step down in EBITDA margins by 3 to 4 percentage points, is that from the average in the first half of '12 or just from Q2 of '12.

Well, if everything else is the same in the second half as was the first half, which won't be the case -- and I don't know, which way we will go, I just know it will be different. It won't be the same, but those 2 factors alone are worth 3 to 4 points. But then you got what's going to have in the pricing, what's going to have in the other cost and all those things. There are a lot of factors in there that they move in 1 or 2 or 3 points either direction. But all things being equal, is basically 3 to 4 points on lower volume and the higher major maintenance expenses.

Right, but it sounds like that's the second half compared to the first half.

Yes, yes.

And moving on to Tony Rizzuto with Dahlman Rose.

All my questions for the most part have been answered here, I just wanted to firm up the timing. Did I hear you say Jack, I just want to confirm that the timing for each phase of expansion would be about 18 months.

Yes, once we pulled the trigger it will be -- depending on what we are doing, but they are typically 18 to 24 months. Once we pull the trigger.

All right, good and then also I know that you were pretty seamless obviously judging by the margin that you achieved in the quarter. But was there any impact at all negative wise in terms of the Phase 4 negative impact that you got here could identify.

Yes, the only impact from Phase 4 is what we signal on the last call, which is we did have some plan outages that curtail some of the heat treat plate production in the second quarter. So that was one of the primary reasons that the second quarter throughput or value-added revenue dollars was lower than the first quarter was the phase 4 expansion.

Okay. So is that still going to be a limiting factor than in 3Q or 4Q?

No, the major equipment outages related to Phase 4 are behind us. There is still a lot of other work that they're doing there, but none of it entails major equipment outages, they are going to be a significant dampening affect on our throughput.

Okay. And just generally -- I mean lot of other companies have been talking about pronounced downward shift in activity levels with customers telling suppliers they need less metal required in the year end. And it doesn't sound to me that your -- outside of the normal seasonality, it doesn't appear to me that you've got any of those similar concerns. And I'm not obviously talking about the heat treat for aero, but in any of your other product categories.

Well, if you go through those -- I will even start with aero, we're seeing normal seasonal weakness in all of our aero applications primarily service centers that's where it shows up the greatest. So we are seeing seasonality even in aerospace and in particular service centers. Automotive, we're seeing strong seasonality in the build rate forecast in the second half roughly 10% lower than the first half, which again is not unusual, but we expect to offset that somewhat -- in the answer I gave to Mark's question, earlier because we have some new programs coming on in the second half. But in the general engineering and other industrial applications, I mean we're seeing a very normal seasonality which is pretty severe here. I mean the economy is no news to anyone on this call. The manufacturing economy is basically flat. So I've heard all the calls of distress in July -- my answer in our staff meeting, well this sounds like a July staff meeting. Everybody moaning and groaning because order rates were down and like duh, that's happened every July. And we saw pretty significantly de-stocking in late June and really soft orders in June as well. So it really started in June leading into July. So to me unfortunately it feels like a normal second half in most areas other than the strong underlying demand in aerospace. But we're still even in aerospace going to see seasonality.

And moving on to Phil Gibbs with KeyBanc Capital Markets.

I just had a question on the CapEx. We're looking for 50 million this year, 50 million next year -- that's let's call it 70 million in growth CapEx. Lot of that this year, I'm assuming if my numbers are right, are they going to Phase 4 expansion? What other, call it internal organic opportunities, do you have to put dollars to work in a good way and where would you be targeting?

Well, we've got -- if you are talking longer term over the next 2 or 3 years, I presume that was the thrust of your question. I outlined a lot of those on the last earnings call, but as we've already alluded to on this call, we've got phases 5, 6 and 7 heat treat plate expansions at Trentwood on the shelf. And it's a question if and when we'll pull the trigger on any or all of those as we go forward as we continue to monitor customer needs and our own views of where the market is headed in general. We still have opportunities to expand our aerospace extrusions business. We expect that automotive -- well we're going to get some initial capacity from -- excess capacity at Kalamazoo that will help us with automotive. We expect there will be making investments in automotive. But then beyond that we still don't feel that we're anywhere near our full potential in terms of the efficiency and the quality capability of our platform. So we've got fairly significant opportunities we're looking at over the next 2 or 3 years that would address the efficiency and quality, not just raw capacity. And those extend throughout the platform, but the major thrust would be in aerospace and automotive producing facilities.

You've done a lot of rationalization through the pipeline on last 2 years and enhance your operational flexibility and cost structure, I mean, how much -- how much more can you do just to the base business to lean it out and where are we in that process?

That will never end and frankly, there are significant opportunities there to continue to make our platform more efficient and enhance our quality.

Okay, and just lastly and I will hop off. How was the capacity expansion going at Alexco and where basically where are we relative to those plans and those targets.

Yes, Alexco is doing very, very well. We are seeing normal seasonality there because there are lot what they do goes through service centers in the second half here. But we are very, very pleased with Alexco and very pleased with how efficiently they executed what was a major capital project, there was a building expansion and a lot of new equipment going in there. So they're real pros down at Alexco and have done a great job from that standpoint. And in terms of Trentwood performed well despite the distraction they've had out there. Trentwood doing very, very well and I mentioned in my remarks, Kalamazoo continues to improve as well. So from a performance standpoint, I never satisfied, I'm just less dissatisfied than normal with our operating performance. Okay, are there any more question, operator?

At this time, there are no additional questions. I'll now turn the conference back over to Mr. Hockema for any additional or closing remarks.

Okay, thanks everyone for joining us on the call today and we look forward to updating you on our third quarter call in October, thanks again.

And it does conclude today's conference. Thank you for your participation today.