Good day, ladies and gentlemen and welcome to the Kaiser Aluminum Third Quarter 2016 Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session and instructions will follow at that time. [Operator Instructions] I would now like to turn the conference over to Melinda Ellsworth. You may begin.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum’s third quarter 2016 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 Chief Executive Officer and Chairman, Jack Hockema; President and Chief Operating Officer, Keith Harvey; 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 two 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, 2015 and Form 10-Q for the quarter ended September 30, 2016. The Company undertakes no duty to update any forward-looking statements to conform the statements 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. Any reference in our discussion today to EBITDA means adjusted EBITDA which excludes non-run 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 Jack Hockema. Jack?

Thanks, Melinda. Welcome to everyone joining us on the call today. Turning to Slide 5 and recapping our results for the third quarter, underlying demand remained solid with normal seasonal demand weakness. However due to an unusually high level of intransit finished goods inventory at the end of the quarter, approximately $8 million of value added revenue is expected to be recognized when delivered in the fourth quarter. In addition, as we had previously indicated during our July earnings call, third quarter results reflected approximately $3 million of higher major maintenance expense compared to the first half run rate primarily related to furnace rebuilds in four of our plants. The higher planned major maintenance expense and the combined impact of lower value added revenue attributable to intransit inventory and normal third quarter seasonality drove a 350 basis points decline in our third quarter EBITDA margin compared to the strong first half run rate. I'll now turn the call over to Dan for additional color regarding the third quarter results. Dan?

Thanks, Jack. On Slide 6, I'll look at value added revenue. As Jack mentioned, because an unusually high amount of aerospace plate inventory produced during the third quarter was in transit at quarter end, facilities finished goods cannot be recognized until the customer delivery in the fourth quarter. The delayed recognition of $8 million of value added revenue on this inventory contributed to third quarter value added revenue declining $4 million or 2% compared to the prior year quarter and $13 million or 6% compared to the strong quarterly pace of the first half of this year. Normal third quarter seasonality across all end market applications also contributed to the decline from the first half quarterly pace. Looking at the third quarter by end use category, aerospace and high strength value added revenue was down 4% or $5 million from the prior year quarter and 9% or $11 million from the quarterly pace of the first half of this year, primarily due to the delayed recognition of value added revenue on the in-transit inventory as discussed. Automotive extrusions value added revenue declined 3% from the prior year quarter and 5% from the quarterly pace of the first half of this year as end of life cycle bumper programs rolled off earlier this year and new bumper programs are ramping up more slowly than we expected. General engineering value added revenue increased 6% over the prior year quarter on incremental sales enabled by the capacity growth from our Trentwood investments. Compared to the first half quarterly pace value added revenue declined slightly due to normal seasonality. For the first nine months, total value added revenue improved 2% compared to the prior year quarter. Aerospace and high strength value added revenue improved 2.5% as modestly favorable pricing was partially offset by slightly…

Thanks Dan. Turning to Slide 9, as we look to the remainder of the year for our aerospace and high strength applications, we continue to expect approximately 5% year over year value added revenue growth for the full year. In the fourth quarter we expect a value added revenue boos from delivery of the third quarter in-transit inventory partially offset by a normal year end seasonal demand weakness. Looking ahead to 2017, our lead times for heat treat plate are down to six weeks and we have indications that the aerospace supply chain will experience destocking in 2017 particularly in aerospace plate products. As a result, we expect the total aerospace and high strength industry demand for 2017 will be down slightly from 2016. There are also signs of increasing competitive price pressure on our aerospace plate non-contract business. You may recall that non-contract orders comprise approximately 25% to 35% of our total aerospace and high strength shipments. We will provide more color on this along with our full year 2017 outlook during our fourth quarter earnings call in February. Looking longer term we anticipate that the aerospace supply chain inventory overhang will be largely addressed in 2017 with supply demand equilibrium restored in 2018. We recently updated our industry demand outlook for our aerospace and high strength served market applications and anticipate that 2019 demand will be up approximately 15% from 2016 driven by increasing single aisle and Airbus twin aisle build rates partially offset by declining build rates for the 747 A380 and the transitioning 777. Turning to Slide 10 and automotive extrusions. With recently announced fourth quarter assembly plant shutdowns as well as continued delays in the ramp up of new bumper programs, we are reducing our 2016 outlook from approximately 6% to approximate 2% year over…

[Operator Instructions] And our first question comes from the line of Curt Woodworth of Credit Suisse.

Great. Thanks, good afternoon, Jack.

Hi Curt. Sorry for the delay there.

That’s okay. I just wanted to drill down more into what you are seeing on the aerospace side. And specifically can you quantify what you are seeing in terms of say your order book that you are building for next year, and give us a sense of the magnitude of the excess inventory you think that could be in the channel?

I will give you some sense now, it's still a little premature, we will put a lot more color in a finer point on that when we get to the February call. We've got a pretty clear idea of what our order book looks like from the OEMs, it's less clear on that 25% to 35% that's been non-contract business, so -- but in total and I made a comment in the long diatribe I went through here on aerospace and high strength. But our current view is that real demand next year will be up year over year but that's going to be more than offset by the destocking. So without putting a fine point on it, the rough numbers we're working with now we see real demand growth positive in the low single digits next year but we see the destocking impact taking actual demand on the mills a negative low single digit. So we don't think it's a dramatic swing in terms of actual demand on the mills year over year, because there is real underlying growth in the overall demand.

Okay, so the low-single-digit volume growth view, that’s more specific to your direct OEM customer base and then –

No, that's in total. That's all products. All aerospace high strength products.

And then can you give us any indication -- you mentioned that you are seeing initial signs of pressure in the noncontract market from an ASP perspective. What level of price degradation are you seeing right now? And then in terms of your contract portion, so ex the 25% to 35% spot, how much of that would be up for renewal this year -- or I'm sorry, in 2017?

Well the spot business doesn't get renewed, it’s basically the subject order to order to price changes. The contract portion is locked down in terms of pricing. So yes, so in terms of total price, it’s really a moving target right now even for the fourth quarter. If I had to put a number on it is going to be a really soft number. I am just going to say it's going to be at least $1 million I think of general engineering and some price degradation, we think we're going to have a little bit leaner mix in the fourth quarter than we had the prior nine months. But in terms of price it’s going to be at least $1 million and it may go north from there or south whichever is the proper direction.

Okay, and then would the plan be to try to shift more capacity into GE plate at Trentwood to try to keep that facility running full in the event that we do get a more broad-based destocking event?

Well let me put -- bifurcate this. One aspect is demand. And so we think demand is going to be down slightly year over year. We're not willing to make any comment on what volume will be until we get to February. I'm not sure our volume will be down, it might be down modestly. But it may be up next year as well. So not willing to put a number on that terms of what it means specifically to us in terms of either volume or price. What I will say is that any price degradation that occurs will not be initiated by us. It only would be us responding to other competitors and maintaining our share.

Thank you. And our next question comes from the line of Edward Marshall of Sidoti.

So my question I guess is a follow-up on that and just in discussion on mix in aero. And I guess there is a difference between plate, which I think you're referring to in the extrusions. Just looking in the quarter itself, it looks like the extrusion price held up relatively well looking at the mix and price. When you look out to 2017 specifically, and your comments regarding destocking, is that specifically to plate? And are you still expecting a relatively decent year in extrusions?

Yes, the answer to the second question in terms of the destocking, right now the primary destocking that we're seeing is in plate, we're not seeing any significant impact of destocking in the other products.

And when you look at general engineering and I anticipate -- I am assuming that when you are referring to the excess capacity that will be in the aerospace supply chain, I am assuming that spills over into general engineering. I think that’s what you were saying. Would you [clarify] -- go ahead.

Yes, to some extent that is the case. We'll see some of the big aerospace players beginning to migrate into general engineering but still the biggest impact on general engineering right now is the foreign competition is the imports.

And I know there is one particular period that you point to all the time that shows kind of how that happened in the past. But could you kind of like maybe think about what the -- because most of your general engineering plate is more sensitive to the pricing changes than say the aero plate just because of the amount of spot in that business. Can you kind of talk about what you would anticipate from a pricing perspective on the general engineering plate versus what you might see in the aero? Based on the excess capacity coming into general engineering.

Yeah, but I don't specifically know what is going to be next year. I mean we have our forecast but those are done with the WE G [ph] board at this point because it's so volatile order by order. But what I can say is that 25% to 35% of the aerospace book of business is non-contract whereas 90% plus of the general engineering book of business is non-contract. So you've got almost three to four times the leverage on price in the general engineering is what we would have in aerospace just because of the mix of contract versus non-contract.

And then I think there is a lot of discussion and thoughts on the auto cycle. And I am wondering what might give you the confidence to get the kind of outlook that you looked. I mean is it purchase orders that are kind of sitting there waiting for the demand that’s sitting there for 2017 that you anticipate? And what’s different say heading into ‘16 relative -- what's different going into ‘17 than it was say going into ‘16 in your confidence level?

Well we don't have it. One thing that’s different in ’17 is we don't have the number of programs expiring in ’17 that we had in ‘16. So there won’t be that much falling out the bottom of the bucket if you will. And what's coming in the top is those programs that we’re ramping up this year that ramped up slower than expected will continue to ramp up next year and we have a number of additional launches on top of those. But when I when I said double digit value added revenue growth, I didn't put a number on that. We've got a pretty wide range on that double digit growth next year in terms of what it could be if all the programs ramp up as expected, we don't expect that they all will ramp up as everyone is saying they will. So we'll give that a haircut as we go into our outlook in February but we're very very confident now with what we see coming in that we should see double digit content growth and that all anticipates that we'll see level builds which at this point we see no indications that we'll be below 18 million builds next year.

Last question for me, the capital allocation. Looking at your business -- looking at the stock rather and being that it's the 52-week low today. I am curious you have repurchased some stock over the last -- roughly about a year ago or so. I am wondering what your thoughts might be about the capital allocation. Would you steer -- you have shown the ability to kind of go into the market when the opportunity exists. And I am curious about the thoughts from a capital perspective and whether you might look at stock repurchases as being in place for that capital to go.

Yeah, well the answer -- Dan has said consistently when asked this question in the past, that we have a grid and we buy more at low prices and less at high prices and we can assure you that we will be buying a lot more at 72 than we buy at 90.

Thank you. And our next question comes from the line of Phil Gates of KeyBanc.

Hi, this is actually Tyler Kenyon on for Phil. How is everyone?

Good, Tyler.

Good. I just wanted to start with just a question on your 2017 aerospace and high strength outlook. What’s kind of embedded just with respect to your expected trends when you break it out by product call it plate versus the extrusion side? It sounds like the destocking itself is more impacting the plate business. But any way to be kind of thinking about that mix as we move into 2017 here?

Well, without getting too granular just qualitatively, as we've commented here on a couple of the other questions, at this point we do anticipate the magnitude of the destocking will occur in flat rolled or plate products call it plate, rather than our long products. So we see long products demand being pretty consistent with what real demand is whereas plate demand is going to be compromised by the destocking.

So kind of tracking up in that low single digit range that you referenced before.

On the plate?

On the extrusion side, that is.

Yes, the excursion side right now we're looking at positive growth in the low single digits area.

And then just a question on scrap pricing --

Excuse me, Tyler, let me just put a point on that. I'm talking now industry demand, not our sales forecast for next year.

Right. Okay, understood. And then just my next question just on scrap pricing. Any way to quantify kind of what the trend has been there as we have moved through the year here? And kind of maybe what any benefit may have been from lower scrap prices year to date?

We've had strong benefits year over year in what we call metal profits, which is basically the amount of scrap that we're using and the discount that we're getting versus prime. It’s been a strong positive for two aspects. It's been -- the prices have been favorable year over year and that's continued in the third quarter, was really strong in the first half of the year, has continued pretty much through the third quarter but part of it also is our manufacturing operations that have re-melts or have cast houses have done a really good job working with our scrap procurement people to really improve the mix of scrap that they're buying and the consumption of scrap. So we're getting a twofold benefit -- scrap discounts have been relatively attractive but our people are doing a much better job of optimizing their raw material utilization and reducing our total raw material costs.

And then how should we be thinking about maintenance costs in the fourth quarter relative to the third quarter levels?

Yeah, major maintenance in the fourth quarter right now looks like it's a couple million dollars less than what the third quarter was.

Okay, any particular projects that you know that you'll be pursuing in the fourth quarter.

I haven’t even looked at the detail of what it is but they're pretty generic. The third quarter was so high because we typically have furnace rebuilds in the third quarter but have four plants going through rebuilds in the third quarter really boosted that cost.

[Operator Instructions] And our next question comes from the line of Paul Luther of Bank of America.

I had a question if you could just provide a little more perspective on the lead times that you talked about in aerospace plate being six weeks, because I think they have come in quite a bit. I thought they were maybe 15-ish or something like that back in May.

More like 30 actually but –

Yeah, and 30 earlier in the year. So like have you seen -- like how many times have you seen these fall to six weeks? Is this kind of unprecedented or have you seen this before in the cycles with destocking? Just trying to get a better sense of the magnitude of what is happening there.

No, this is this is not unusual, when you get those unusually long lead times it's not unusual for them to collapse pretty quickly.

Okay. And then on the -- if I could take a step back too, in terms of the aerospace outlook [ph] refresh that you alluded to, when you take a look at that do you focus on the OEM build rates and their latest delivery forecast that they provide or do you add your own tweaks to it or it take hair cuts to it? I'm just wondering if you could just provide a little more color on the process that you do on the refresh.

We absolutely do at our own tweaks, we look at what the skyline looks like from the airframe manufacturers, we look at what Airline Monitor has to say, we look at what Teal has to say. And then we put our own opinion into it as well just digesting what everyone else is saying plus what we think is realistic.

Okay, cool, makes sense. And then if I could shift gears to general engineering plate and the competitive price pressures. I think we have been -- I am sure you are tired of talking about them, it seems like they have been going on for quite a while. Can you characterize if they have changed at all in terms of if they have gotten stiffer or perhaps eased up over the past couple quarters? And how they look for 2017 and if you think there might be opportunity for trade cases here?

Well, let me start with what's actually happened to us. The impact on general engineering while the market has been pretty fierce over the past couple of quarters our people again have done a really good job of managing their product mix and taking advantages of opportunities in the marketplace and have minimized the impact on us to where it didn't even round up to a million dollars in the third quarter compared to where we'd been running in the first half. And we were expecting was going to be quite a bit more than that in the third quarter. Right now we think it may be as I said a million or so in the fourth quarter combination of aero and 6X of general engineering but it could grow from there. So does that lead to government action on those products? It's unlikely -- back I don't remember the time frame, I'm going to say it was ten or twelve years ago even actually Alcoa initiated an action against the South African mills and we were successful in proving that there was dumping. However, but we joined in that action by the way. However there was no evidence of damage on the mills because aerospace was so strong and the mills were profitable and so no tariffs were implied or employed at the time. So we probably have the same kind of situation now where even though we maybe have some transition in 2017, we're still looking at strong secular demand growth here and strong markets. So it's unlikely that we can get tariffs applied.

Okay, great, that is really helpful perspective. Thanks for that, Jack. And then the last one if I could and then I will get back in queue. When you talked about the delays in bumper projects, is that just part of the growing pains, the start-up pains of the new products or is it -- just wondering if it is driven by the buyers or if it is driven by the launch of start-up pains and launches at your facilities.

It's a combination, we have to start with what our customers tell us is going to happen and we know when they tell us that they're telling us that it’s going to be really really strong, because they want to make sure that we're fully capacitized stand and ready to handle the volume if the model really takes off when they launch it. So first we have to do that and then we get into the reality of what happens, we make our judgments to that already versus what the customers are saying but then you get what actually happens in the marketplace. And in terms of launches this year there was one particularly very large program that has not -- that particular model has not had very good acceptance in the marketplace and so their sales of that particular model are significantly less than what they expected and frankly what we expected. So and that it's not unusual. You may get delays in the start up or you get consumers not going forward or you can get consumers really going in heavy and it really takes off. So when you're talking about a new program there are really a number of variables in there and it's really difficult to predict what the volume is going to be from the launches.

[Operator Instructions] And our next question comes from the line of Anthony Young of Macquarie.

Just on the in-transit sales that you guys had for the quarter, is that related or would that be a symptom of the destocking in the aerospace supply chain? Or did you guys just have a big order leave on the last day of the quarter or how should we think about that?

Every quarter we have in-transit, we have -- we recognize the revenue based on the FOB point, we have some that's FOB, our plant and so it gets billed and recognized as revenue when it leaves the plant. Other doesn't get recognized until it’s received at our customers operation. And in this case we had a significantly higher volume of overseas shipments in the fourth -- the end of the third quarter, those can go to Europe or Asia, you get long long pipelines there so it was a lot more material than normal and that's what created that unusually high inventory. But we always have it. It's just the fact that we had a lot more here in the third quarter.

And so with this quarter being a lot higher, you guys experienced the cost of goods sold in this quarter also?

The costs get capitalized in the inventory and so the cost does follow when the recognition occurs.

And then just with respect to the aerospace supply chain and you guys talked a little bit about having your own estimates with respect to how the destocking may work. But I mean in your opinion, the destocking is going to occur next year, is that just to sort of get on sides with where Boeing and Airbus are on the A380 and 747 cuts? And if there may be another round in the 777 this destocking could last longer? Or how should we think about that?

Well, typically we get a pretty small window from the OEMs in terms of what our demand will be from them for the next full year. So we've got a pretty good idea what we'll have in 2017 within a relatively tight band. And then 2018 really depends on -- right now we're anticipating what we think the builds are going to be in 2018, 2019 and 2020 and that's what leads to our outlook for demand, because we think that they're taking action now, that pretty much gets that supply chain imbalance. But if they change or we change our outlook in terms of what the builds are going to be in ’18 and ’19 and ’20 versus what we have now, then that that could create additional destocking in future years. Or it can go the other way obviously.

Thank you. And our next question comes from the line of Jeremy Kliewer of Deutsche Bank.

Just kind of following up on the comments of the $3 million to $4 million of EBITDA from the in-transit product, those margins came from relatively high anywhere between 38% and 50% of your value added revenue. So I was just trying to tie that, is this a large commercial customer, are these other aerospace products or where is that falling in your bucket of volume?

Well we won’t make a point of calling out customers other than saying it was aerospace plate and the real issue here is what's the incremental impact to EBITDA which is not going to be 25%, which is that’s the whole portfolio. So I think it’s unreasonable to assume that it could be in the territory that you were talking about in the 30% to 40% in terms of that incremental impact.

But remember what gets booked or capitalized into inventory is the cost of goods sold. That does not capitalize SG&A, R&D and all those operating expenses. So it's more than just the EBITDA. It's also covering all of those other overhead expenses that do not get capitalized in inventory. So that's why you get a much higher margin than the average EBITDA. And if you go do the calculations of what our gross profit is it’s typically running 35% or 40% plus on our average product mix.

All right, thank you for the clarification. And then your comments about the possible 15% value added revenue in 2019 for your aerospace business versus 2016. Again, you are saying it’s a 5% CAGR over those three years but it’s 15% in the last year. So is it relatively flat then over ‘17 and ‘18 in comparison to 2016?

No, I just gave two points there. So basically we're saying ’16 to ’17 is going to be relatively flat or slight -- we think slightly down in terms of industry demand. But then with the inventory overhang washed out, we think that if you compare ’18 to ’16 we're looking at high single digits or low double digits compared to ’16 and then by the time you get to ’19, it’s up to approximately 15% plus or minus compared to 2016 which is the 5% CAGR over the three years, ’16 to ‘19. End of Q&A

And I am showing no further questions in the queue at this time.

Okay. Thanks everyone. Yes, thanks everyone for joining us on the call. We look forward to updating you on the fourth quarter and give you more granularity in terms of our 2017 outlook on the February call. Thank you very much.

Ladies and gentlemen thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.