Good day, ladies and gentlemen and welcome to the Kaiser Aluminum Fourth 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 hand the floor over to Melinda Ellsworth. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's fourth quarter 2016 earnings conference call. If you've not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com where we've 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, 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 and the reconciliations for 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. We'll start with comments on the fourth quarter and full year 2016 results and conclude with a discussion of our outlook for 2017 and beyond. Turning to Slide 5, underlying demand remain solid in the fourth quarter with normal seasonal demand weakness. As we discussed on the previous earnings call, strong shipments and value-added revenue were supported by delivery of the unusually high level of in-transit finished goods inventory at the end of third quarter. Sales margins remained strong as the negative impact of competitive price pressure in the fourth quarter was offset by a favorable product mix. In addition, we continue to benefit from a strong underlying manufacturing cost efficiency derived from prior capital investments as well as focused efforts on process improvements across the platform. Turning to Slide 6 and a review of the full year 2016; we achieved record value-added revenue, record EBITDA and record margin. The record value-added revenue was driven by solid demand across our aerospace automotive and general engineering applications and by lower contained metal costs that enabled increased spreads over metal on certain high value-added products. Record EBITDA and margin reflects strong sales margins and record underlying manufacturing cost efficiency. While we enjoyed tailwinds from solid demand and low contained metal costs during the year the strong operating performance was the primary driver of the results. Our best-in-class customer satisfaction performance was a key enabler supporting strong sales across our broad product offering and our previous investment for quality, capacity and efficiency across the platform facilitated the strong sales and manufacturing performance. Underlying manufacturing cost efficiency was a step change improvement in 2016 reflecting record performance at several locations. In addition, a focused effort in our purchasing and manufacturing operations around procurement…

Thanks, Jack. For the full year of 2016, value-added revenue grew 3% to a record $813 million reflecting solid demand across applications, as well as elevated sales margins for certain aerospace and high strength and general engineering products as we benefited from low contained metal costs for most of the year. Value-added revenue for the fourth quarter grew to $201 million, a 6% increase compared to the prior year fourth quarter and notwithstanding fourth quarter seasonality of 3% increase compared to the third quarter. Delivery of the higher than normal in-transit inventory that we mentioned on our third quarter earnings call led to record aerospace and high strength shipments in the fourth quarter, aerospace and higher strength value-added revenue of $119 million in the fourth quarter was a 9% increase compared to both, the fourth quarter of last year and the third quarter of 2016. For the full year, aerospace in high strength value-added revenue grew 4% to $467 million, an $18 million increase over 2015 as lower contained metal costs for most of the year supported improved sales margins on a relatively flat volume. Increasing underlying metal prices late in the fourth quarter of 2016 however, have more recently been squeezing sales margins on some of these products. Value-added revenue for automotive extrusions in the fourth quarter of 2016 declined 5% or $22 million to $26 million from the third quarter reflecting normal year-end seasonality. Compared to the prior year fourth quarter value-added revenue declined 4% reflecting lower bumper shipments due to delayed and slower ramp-ups of new programs. For the full year, value-added revenue for automotive extrusions was $112 million, a slight improvement over the prior year. Growth in chassis structures [ph], driveshaft tube and inter-lock brake systems was offset by a decline in bumper programs -- shipments…

Thanks, Dan. Turning to Slide 11 and the outlook for our aerospace and high-strength applications; market fundamentals are unchanged. We continue to expect industry demand growth at a 5% compound annual growth rate over the next three years supported by order rates that are sustaining the large 9-year order backlog for commercial airframes. Further supporting the integrity of the backlog, Boeing recently announced that deferral requests are running at 2% of the backlog compared to the historic rate of 6%. We reiterate our outlook for solid demand growth over the next three years for these applications. However, as we mentioned on our third quarter earnings call and in last evening's earnings release. We expect destocking in 2017 as the commercial aerospace supply chain inventory adjust to revise production forecast for larger airframes. While we expect increased real demand in 2017, the destocking impact is expected to temporarily reduce industry demand for our aerospace and high strength products by approximately 5% in 2017 compared to 2016. The decline in 2017 demand is not out of the ordinary and is expected to be a temporary pause in the steady long-term demand growth for our aerospace and high-strength applications. Similar to our past experience, we expect to emerge from 2017 with strong industry demand approaching 10% annual growth for these applications in both 2018 and in 2019 driven by growing commercial aerospace builds, recovering growth for business jets, and solid growth for military aircraft including both domestic and international demand for the Joint Strike Fighter and prior generation aircraft. We are very well positioned in the marketplace and despite supply chain destocking, we expect our strong competitive position will support shipments for these applications this year similar to last year. As we've previously experienced during periods of destocking we anticipate competitive price pressure…

[Operator Instructions] Our first question comes from the line of Edward Marshall from Sidoti.

So I wanted to talk about the aerospace destocking, I think you talked about it at length I just want to understand what product line is that extrusions or plane or is it both?

Let's go back to the reason for the destocking is primarily because the longer term production forecasts for large airframes have been reduced and large airframes have a much higher content of plate than the other products. So the most significant destocking impact is on plate products although we're seeing a little bit of it in other products just because they're not as heavily used in the large airframes.

So maybe we're getting into some dangerous territory but I will ask extrusions are slightly higher margins I think for the business overall? How do I think about aerospace margin as we move into 2017?

Well extrusions have a much higher value added revenue per pound, margins as a percent of value added revenue are similar. So they have a much higher dollar per pound margin but similar percentage of value added revenue.

Got it. Okay. Secondly, I wondered if you could quantify the basis point improvement from lower contained metal prices either for the year -- actually for the year and for the quarter itself?

It's really difficult to do. We tried to do that, but it's really hard to separate. The product mix is so diverse, and it's really hard to separate how much is contained metal, how much is product mix and how much is actually price action in the marketplace. But it was significant components of both.

Got it. And you talked about low 20s% EBITDA margin for the first half. I'm kind of curious with the backdrop that you laid out for 2017, as you get through the maintenance and maybe some of the destocking, how does the second half relate to kind of, say, the first half/second half of 2016 from an EBITDA margin perspective?

Well, we think the third quarter will look a lot like the first two quarters. So this is really a nine-month phenomenon rather than a three-month or six-month phenomenon, although that $5 million of incremental major maintenance will be concentrated in the second quarter. So the first and the third quarter won't have that $5 million bite compared to prior year -- approximately $5 million bite. So the fourth quarter should start to come back. It's way too early to predict what pricing will look like by the time we get to the fourth quarter. In the fourth quarter, we usually have seasonally weaker demand, so that has a tendency to drive down margins as well. So, at this point, it's hard to predict margins. The only thing that we'll predict as we get to the fourth quarter is that we expect to see improved operating efficiencies, and we'll start to put a finer focus on that as we get closer to the second half of the year.

I guess if I could just reask that a different way, I guess if I look at your business over the last couple of years, you've run into the mid to high teens -- 26%, 27% EBITDA margins in the first half of 2016. I'm kind of curious as to the benefit that you may have received from contained metal costs and maybe what the normalized EBITDA margin for your business. I know there's a lot of moving pieces here that we kind of can think about once you get through this need.

Sure. Let me just walk through that. So let's start with the first half of 2016, the roughly 26.5% margin and then come to what we've signaled for the first half of this year that gets us into the low 20s%. Start with pricing and that's a combination of competitive price pressure and higher contained metal costs, a combination of those two, right now we see those driving our sales margin down by 150 to 250 basis points. So that's the pure pricing impact, and those price levels are migrating to levels similar to what we saw in 2014 when we had the last bout of destocking. So since between 2014 and 2016, we picked up about 250 basis points of pricing, and that was a combination of lower metal prices and of less pressure on competitive pricing. We've got price increases, especially in the second half of 2015, that carried into 2016. So where are we in the future? Are we going to be at 2014 levels or 2016 levels? We don't count on 2016 as being a permanent scenario, nor do we count on 2014 -- we think it would be somewhere in between -- that zero and 250. Major maintenance in the first half, that $5 million of incremental major maintenance year over year, that takes out about 100 basis points of margin. So now you are up to 250 to 350. And then efficiency we had, as Dan said in his remarks, we had substantial efficiency benefit. I think the number was 14, so it was over 200 basis points of margin that we gained on cost efficiency. So, if you take out -- if we get somewhere between where we were in 2016, which was all-time record performance and where we were in 2015, you can get another 100 or 200 basis points. So if everything else remains equal, it gets you between 350 and 550 basis points or 21%, 23% margin, somewhere in the low 20s range.

Our next question comes from the line of Evan Kurtz from Morgan Stanley.

So I had a question on trade. You mentioned that the GE plate was under some pressure from increasing imports, likely to continue into 2017. We have an Administration now that seems to be very receptive for trade cases. Is this something that's being discussed or contemplated at this point?

We talk about it obviously like everyone talks about it, what's going to happen here. Obviously we don't know, we don't plan on it, but if we get some kind of control on imports, frankly, it would be beneficial to us. Because we're convinced that some of the price pressure that we're seeing is a direct function of unfair trade.

Right. Okay. And who usually takes the initiative on those sorts of things in the downstream aluminum industry -- is there an industry body that would spearhead some sort of trade action, or would that have to be some sort of organization amongst the actual companies?

I think it will be the trade organization where we all coalesce. It may not be everybody in the trade organization, but that's a place where we can gather and take that kind of action.

Okay. And then maybe just one other question on recycling. You mentioned that that's something you've been working hard on. Where are you right now just ballpark as far as your scrap usage as a percentage of your total metal purchase, and what are kind of the technical limitations upon where you actually think you can get to as far as using scrap?

Well, the answer in terms of scrap utilization is really a function of the product mix. The general engineering products, long products in particular, we can get very, very high scrap utilizations and have historically. The high-strength aerospace and high-strength applications we're able to utilize less scrap than we can in most of the general engineering and the automotive applications. Are we at saturation in 2016? I think we're pretty close to our full potential in terms of scrap utilization. We continue to push for improvements, but we've really made step change improvements in 2016. Going forward I think it will be more a function of availability of scrap. We had good availability in 2016, which really facilitated our efforts. As we were ramping up our ability to consume scrap, we had favorable market conditions. So we think we're pretty much where we should be long-term in terms of utilization. Now it will be a function of what are the spreads compared to prime and what's the availability of scrap as we go forward.

And can you say exactly how many pounds of scrap that you purchased in 2016?

No. We have the number somewhere, but again it's so diversified by plant and by product that it becomes a meaningless number.

Our next question comes from the line of PT Luther from Bank of America Merrill Lynch.

I wonder if we can talk a little bit more about the aerospace market, what you're seeing there? In the prepared remarks and in the release, you talked about 5% demand decline because of the destocking going on. But you guided to similar shipments year over year in aerospace and high strength. So I just want to be sure -- should we infer that share gains are anticipated in that market? Is that where that delta is coming from?

If the market is down 5% and we are flat, that would be a share gain, yes.

Okay. And is there any particular product or just trying to think is it a different product that has a different VAR per pound or margin?

No, what it gets back to in terms of share, share is a function of who our clients are versus the total mix of clients in the market space or marketplace. So it doesn't necessarily have anything to do to any specific short-term action we've taken. It's more a function of how things change within the mix of customers that we have and our position with those customers.

Okay. Understood. Thanks. And can you also update us on lead times in aerospace plate and the unit overhangs there if you see it? I think you said -- I want to confirm you anticipate it lasting through the bulk of this year. Do you think there's a chance it could alleviate sooner than that?

The lead times are in the seven- to eight-week timeframe right now. We see the destocking running through most of this year. We're pretty confident it should be essentially cleaned up by the end of the year, although there is nothing ever quite that precise. But that's certainly the way it looks right now. So basically we're seeing 2017 that what you see is what you get, but that we're really, really optimistic that it's going to bust loose coming in 2018 and 2019.

Got it. Okay. Thanks for that. And then final one for me, and then I'll turn it over. The big trend with facility upgrade that you're working on, is there a way you can kind of give us a sense or ballpark of what that could translate into for all your earnings once that's running? Because I know you said that the focus on this upgrade is more on cost efficiencies than it is on volumes. So I'm wondering how we might think about what margins might ultimately look like once that thing is in place and running?

Well, what we've been saying for quite some time is that we continue to believe that the long-term potential for this business is to get into the high 20s% in terms of margin. We got to 26.5% first half of last year. That is sustainable last year through a full year when you get down to the weaker demand in the second half. But we're very confident still that we can get this to the high 20s% in terms of margin with additional value-added revenue growth from where we are now into the 900s in terms of value-added revenue as we go forward. And those are really primarily a function of capacity growth at Trentwood and as well as capacity or sales growth shipments growth in automotive, combined with significant cost reduction we expect. So it's really if all of those factors come together, I wouldn't want to just tie it directly to that because this doesn't complete the work that we're going to do at Trentwood. We still have capital projects beyond this year, important capital projects that will continue to drive efficiency. But we're confident we're going to drive efficiency and drive our margins. Even if we don't get it in sales price or sales spreads, we're going to get it through efficiency and volume that absorbs our fixed costs.

Our next question comes from the line of Andrew Quail from Goldman Sachs.

Thanks for the update. Congrats on a very solid quarter. My first one is on SG&A. Have you guys got any guidance as we head into 2017? I would say an increase of around $7 million or $8 million last year. That's obviously been consistently sort of increasing the past several years. Can you give us some guidance what we should expect this year?

We're looking for overhead. I'm going to let Dan answer this.

I don't have a precise number here for you, but we are trying to manage some overhead levels, trying to keep it level as a target. Also, the challenges that we are facing there with benefits cost that continue to increase that happened throughout this last year and for the last several years. In overhead I think you are also going to be counting the numbers that you are seeing the incentive compensation that we saw. Again, this was a very good year for Kaiser. So we had very good performance financially, as well as on key metrics that we are rewarding folks for attaining. And as we go into next year, obviously the financial results are probably not going to be as strong as they were in 2016. So that will be a factor, too, as you look at the overhead.

And that EBITDA walk you have on Slide 8, that $19 million, I'm pretty sure most of that is SG&A, is that right?

Say that again?

On slide 8, your EBITDA walk.

Yes, yes. That's mostly going to be, the overhead is in there. In fact it's mostly overhead.

And benefits.

And benefits, I mean -- but that's part of the overhead as well.

Got it. And Jack, just to be 100% crystal-clear on this aero guide -- you're saying it's negative 5% and then the 10% in 2018, 2019. Obviously it's revenue, right?

Yes, revenue; correct.

Value-added--

Yes -- now, that's industry demand growth. So that's not necessarily our sales forecast. That's what industry demand looks like.

Got it. And did you guys have -- I mean, do you think you have any sort of breakdown of what that would be versus the content growth versus, like, overall volumes?

Well, it's hard to say content growth, because it's really a function of the mix of airframes that they will be producing. So if you go back to the prepared remarks, we are seeing steady growth and if you look at the slide deck that we put out last night or that we have today -- but we put it out last night I think with the earnings release -- back in the appendix, we show the outlook for builds, and you can see total builds steadily growing over the next three years. But the de-stocking actually this year -- the real demand is positive, but the de-stocking moves the industry demand down to a negative level. But then we've got the added boost that we also mentioned in the prepared remarks -- business jet volume is improving, then it's been languishing for several years. And military is really beginning to pick up. The Joint Strike Fighter is ramping up, but we're also seeing strong demand for some of the prior-generation military airframes, both domestically and internationally. So, defense or military applications really have become a good news story in this as well. So we're really, despite what we read -- some of you guys on the sell-side say, we, I mean the people we talk to -- our customers -- we are very, very bullish about the outlook here in 2018 and 2019.

Are there any sort of signposts that you guys look are looking for, sort of as you head through 2017, that will show that this de-stocking phenomenon is actually short lived and won't last into 2018?

Well, I mean, we'll see it as the year unfolds. We're probing our customers every day. So we're really monitoring this very, very closely. This is very recent information. I mean, we put this together a couple months ago, but we've been pushing it the last week or two before the call to validate that these numbers and these forecasts are still true. So, everything that we know right now, we're pretty confident that it's going to be this year, it's going to last most of the year this year, but it should be cleaned up.

[Operator Instructions]. Our next question comes from the line of Jorge Berenstain from Deutsche Bank.

Good afternoon. Hey, Jack, maybe my question is more for Dan; he brought it up. On slide 12 of your slide deck, you talk about the split right now that you have between the automotive end markets and at the -- you mentioned the ABS and the drivetrains are mature. Those were being substituted by chassis, structural; and I thought I heard Dan say that the structural were more lower-value-added. Could you just clarify if I heard that right? And just also talk about just generally the mix change that's going on in auto? Do you expect it to be more or less value-added than your historic blend per pound? And then talk as well about margin.

Sure. I mean, that the answer was yes; you did hear me say that the growth opportunities, which were chassis and structures and the bumper systems, those are going to be lower-value-added than our existing product mix has been. And so, when we see growth for the opportunities in automotive, it will be growing into those lower-value-added products. So the mix will shift. I think Jack spoke about the mix shifting in that direction as well. And I think that's basically the answer to your question. Maybe you have something I missed.

Well, in percentage margin, could you also quantify if it costs less to produce? So, generally speaking, would you expect EBITDA margins, adjusted EBITDA margins to be up or down versus your historic mix, as you cut in the new product?

Yes, generally our product mix is going to have a similar EBITDA to value-added revenue ratio. So even though they may be lower value-added revenue per pound, they'll have a similar margin impact.

Got it. And then maybe could you talk a little bit about the bumpers? Specifically, I'm just trying to understand, what is it that has led the OEMs to have a slower-than-expected adoption of these crash-management systems? Is it that the models, there's just been less consumer demand, or have they actually slowed the rate of production with some of these aluminum-included kind of crash-management systems? Could you just clarify what is the hold-up there?

Sure. It's really the sales of the models rather than the adoption of the crash management. So the model or the platform is designed with the aluminum crash-management system, but the projected sales for some of those platforms, the specific platforms, have come in lower than anticipated. And that's really consumer preference. So, some of these platforms that everyone thought were going to be really, really strong sales, and as consumer opinions change, the forecast changes. So they shift to trucks or they shift to large sedans rather than some of these SUVs or crossover vehicles. So it's really a function of what specific models are being sold, rather than the design of the vehicle.

Okay, well I guess you guys could offset that over time if you get spread across enough platforms. So, it just seems like there's no change really in the tone of the OEMs adopting this aluminum; it's just that on those specific models, you're saying you've had kind of bad luck to be on slow-acceptance models.

No, that's exactly it, Jorge. You've got it. It's really -- I mean, we book these things usually two or three years ahead of time before the actual production starts, and then it's just a matter of how successful that model is. But in terms of the content, the content is still growing.

Our next question comes from the line of Josh Sullivan from Seaport Global.

Yes, just a follow-up on the auto side there. You know, do you think you could comment on where you see the CAFE standards going? I believe there were reports out today of an automotive industry group advocating one way or the other. How do you guys see the process developing, and then how does that layer into your outlook?

Yes, who knows where that goes? You know, there's certainly going to be a lot of conversation about it, and the big vehicle manufacturers are pushing hard for a change. In terms of what it means for us, which is really the more important aspect, rather than the political aspect on this -- we remain very confident regardless of what happens to the CAFE regs, and I'll go back to history. If you go from 1990 through, I'm going to say without looking at some of our charts that are in our business update, through roughly 2005, to maybe even 2010, there weren't any changes in CAFE regs, and during that period of time the content for aluminum extrusions grew at about a 4% CAGR. So we are confident, even if they make changes in CAFE regs there, not really going -- they're not going to take away the increases in CAFE regs; they may knockdown that 50-mile-per-gallon standard, but the real challenge and the reason that the automotive manufacturers are complaining, is that to get to those 50-mile-an-hour standards require dramatic changes and very expensive changes in engine technology. But the most cost-efficient way for them to achieve greater fuel efficiency is via light weighting, which is what was happening for the prior two decades before the CAFE standards started ramping up. So, we've -- we watch this, obviously. But in terms of the aluminum-extrusion content, we remain confident that regardless of what they do with CAFE standards we think there's still going to be pressure for fuel efficiency from both the regulations, but also from the consumers, and we're very confident we're going to see growing content for our products, whether it's 5% or 6% or whatever the number is -- longer-term, it's going to be very, very strong growth for many years.

Okay, thanks for that. And then on the inorganic growth opportunities you highlighted, are there any specific areas you guys are interested in at this point?

No, I mean nothing different than what we've said all along. I mean, we'll go outside the current mix. But it needs to be a business that we understand, needs to be complementary to what we do; and most importantly, the big obstacle that we've had over the past five years or so, is that we're not going to overpay, and some of our peers have been grossly overpaying for assets. And we just won't go there. But if there is a complementary fit for our portfolio, that is there at a reasonable price that creates long-term shareholder value, we're ready to spring for it.

Okay. Actually, you know what? Just one last one on aerospace. You know, on the pricing pressure, how much of your product is under contracts versus more spot-market orientation?

I've got it in my notes here. I'll have to recall -- I haven't answered this for a while. Dan looks like he has it on the tip of his tongue.

I think we've said pretty consistently, that it's generally about -- and we're talking plate primarily, right?

Well, no, no -- let's go back; our general engineering products are virtually all non-contract. And aerospace and high-strength -- Melinda is going to correct me if I'm wrong; no, she's going to tell me -- Melinda confirms what I was going to say, that aerospace and high-strength is about two-thirds contract, one-third non-contract.

Thank you. And that concludes our question-and-answer session for today. I'd like to turn the conference back over to Kaiser Aluminum for any closing comments.

Okay, thanks, everyone, for joining us on the call. As we said, we've got some headwinds in the marketplace but -- and some big, strategic projects going on at Trentwood that are going to give us some headwinds this year, but are going to give us some really significant tailwinds going forward. We're really, really optimistic about where we're headed in 2018 and 2019, and look forward to migrating this year. And we'll continue to update you on our first-quarter call in April. Thank you.

Thank you. Ladies and gentlemen, thank you for your participation in today's conference. This does conclude the program and you may now disconnect. Everyone have a great day.