Good day, ladies and gentlemen and welcome to the Kaiser Aluminum First Quarter 2017 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] As a reminder, this conference is being recorded. I would now like to introduce your host for today's conference, Ms. Melissa Ellsworth. Ma'am you may begin.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's first quarter 2017 earnings conference call. If you've not seen a copy of today's earnings release, please visit the Investor Relations page on our Web site at kaiseraluminum.com. 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, 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. Overall, we achieved solid first quarter results that were comparable to the record prior year results. As we had discussed on our February earnings call, our first quarter results were negatively impacted by headwinds from aerospace supply chain destocking, lower sales margins and construction related inefficiencies at Trentwood. Despite the headwinds, our first quarter adjusted EBITDA and margin were comparable to the prior year results as strong operating performance and improved costs partially offset the headwinds. Total shipments increased 3% compared to the prior year quarter and the storyline reflects both real demand and the influence of supply chain inventory actions. Significantly higher general engineering first quarter shipments reflected strong real demand bolstered by supply chain restocking compared to destocking in the prior year quarter. The increase in general engineering shipments more than offset year-over-year aerospace shipments due to destocking in the aerospace supply chain. However, the lower value added product mix combined with the competitive price pressure and higher contained metal costs have squeezed margins on certain non-contract sales drove year-over-year decline in value added revenue and sales margins. The unfavorable sales impact was largely offset by a strong operating performance and improved year-over-year cost facilitated by significantly improved manufacturing efficiency across our platform that offset construction related inefficiencies at Trentwood, favorable price spreads on scrap raw material purchases and lower major maintenance and overhead cost. On the financial results, during the first quarter we returned approximately $42 million of cash to shareholders including $9 million of dividends and $33 million of share repurchases that were comparable to the total repurchases for the full year of 2016. In addition, the Board recently authorized an additional $100 million for ongoing share repurchases, reconfirming confidence in our long-term outlook for the business. The Trentwood's strategic investment in monetization project is proceeding as planned and as we have previously discussed, we were prepared for major construction activity and equipment outages in the second quarter. Before discussing the details of the second quarter outlook, I will turn to Dan now for additional color regarding the first quarter.

Thanks Jack. As Jack noted, first quarter shipment volume increased 3% year-over-year, while first quarter value-added revenue declined 3% to $204 million. This reflected a leaner mix with fewer aerospace shipments and more general engineering shipments as well as tighter sales margins on spot transactions of our higher value added products. Aerospace value added revenue declined 9% from the prior year quarter and aerospace shipments declined 5% reflecting moderated demand due to inventory destocking in the aerospace supply chain. Additionally, value added revenue decline reflected tighter sales margins as competitive pricing prevented recovery of an increase in our contained metal cost on aerospace spot transactions. Automotive value added revenue increased 3% over the prior year period as following multiple launch delays and slow ramp ups throughout 2016 activity on our new bumper programs stepped up significantly. Bumper shipments in the first quarter were substantially higher than any quarter in 2016 and we expect further growth in these programs as the year progresses. General engineering value added revenue improved $4 million or 7% compared to the first quarter 2016. Solid underlying demand for our applications bolstered by supply chain restocking in the first quarter for some GE products enabled 13% year-over-year increase in our shipments. Nevertheless, competitive conditions hindered our ability to offset rising contained metal costs on spot sales of our higher value added general engineering products. First quarter 2017 EBITDA was $54 million nearly matching the record of $55 million established in the first quarter of last year. The $1 million EBITDA reduction reflected a $7 million adverse sales impact from early due to the shift of product mix and the sales margin compression largely offset by $6 million of lower costs. The cost categories generating the $6 million were favorable price spreads for scrap raw material purchases, lower…

Thanks Dan. Turning to Slide 8, our outlook for both the second quarter and the first half of 2017 is consistent with our prior comments on the February earnings call. Although the second quarter business climate is expected to be similar to the first quarter strategic construction activity at Trentwood while providing substantial future benefits will be a temporary but significant drag on results. The plant construction activity is integral to the Trentwood modernization program to further enhance our quality and cost capability, while also increasing our production capacity. The projects include installation of a new heavy gauge plate sheer on the hotline in the second quarter to improve quality, reduce conversion cost and increase capacity and modernization and upgrading in the second quarter and the third quarter our heat treat processing for light gauge plate to significantly enhance quality and reduce conversion costs for these products. The plant equipment outages and construction at Trentwood will result in reduced shipments and substantial operational disruption, while we will begin to reap the benefits later in the year, second quarter and third quarter results will be affected by the work. We expect to be consistent with our prior comments, major maintenance expenses in the second quarter will be approximately $5 million to $7 million higher than the first quarter also construction related disruption to Trentwood's operations will cost significant manufacturing efficiency in the second quarter extending into the third quarter and Trentwood's scheduled equipment outages will restrict throughput and reduce shipments in the second quarter and to a lesser extent in the third quarter. With these temporary internal headwinds, we expect second quarter shipments and value added revenue below the first quarter and second quarter EBITDA margin approaching 20% as a consequence of the temporary construction related costs, inefficiencies and restricted throughput.…

Thank you. [Operator Instructions] Our first question comes from the line of Curt Woodworth with Credit Suisse. Your line is open.

Hi, good afternoon, Jack, everyone.

Hi, Curt.

I'm just trying to square some contrasting comments you made on the Aero/HS market because on the one hand you're talking about continued negative effects from destocking for the year, and then also some to use your words substantial operational impacts 2Q leading into 3Q, but your volume guidance suggest that you're going to be flat year-on-year for this product. So I'm just wondering how that worse are you offsetting the destock or the operational headwinds through inventory build and then selling more in the spot market, are you expecting maybe more material growth in the back half of the year?

Well, I think we've been saying pretty consistently over the past few quarters that our comments relate to total demand, not specifically to what demand on Kaiser would be related to our specific position with our specific customers within the space. We're expecting a positive impact to year-over-year second half, our second half was down a little bit last year compared to the first half, we are expecting positive second half as we come out of the construction activity. But we've also been saying that we expected that the primary impact on us from the aerospace destocking would show up in sales margins this year rather than showing up so significantly in our shipments. So I think we've been consistent in saying what our shipments would be for the year and saying the big impact would be sales margins.

Is it a margin impact a function of just shifting to maybe more commodity products that you would sell into the spot market or how…

It's competitive price pressure on our non-contract business, so we have a very strong relationship and are committed through the cycle to our service center customers, which is where most of the non-contract business is. So, we are the supplier there, but when the market gets soft, a lot of people try to attack that market, the non-contract business in pickup spot orders. So, we'll typically continue to get the business, get the orders, but our prices will be degraded by competitive pressures.

Okay, excellent. And then can you talk about where your lead times currently stand for your aero products and maybe how that could compare to where you are at the start of the year?

Our aerospace plate is still around 9, 10 weeks, so a little bit longer, 11 to 12 weeks on aerospace so it stretched out a little bit, our general engineering plate is out closer to 16, 17 weeks.

Okay, great. Thanks very much.

Thank you. And our next question comes from the line of Edward Marshall with Sidoti & Company. Your line is open.

Hi, guys, good morning.

Yes.

So, the question I wanted to just follow-up to what Curt was actually getting at, you get a sense that as we progress throughout the year and you talked about softness to maybe the value-added revenue component of the spot market business for aero. But as you start to see a pickup in general engineering and I guess general engineering plate, how does that impact the spot market for aero and vice versa, because generally I think they work in tandem.

Yes. They do work in tandem on the non-contract business, although the aerospace portion is primarily domestic competition whereas the general engineering has a very heavy import component in addition to some domestic, but it's more of an import competition whereas aerospace is more domestic competition.

So as we sit here looking at what happened in general engineering in the first quarter, do you have any -- do you feel little bit better about this strength maybe a pricing in spot as we move throughout the year than you did maybe sitting here in the fourth quarter call?

Well, what we characterized or what I characterized in my comments is that we think that we've bottomed out and we've really bottomed out at levels similar to what we experienced in 2014 under very similar circumstances, the situation was almost a carbon copy of what we're seeing today. The big issue is what happens to metal prices. We're seeing some ability now to move with the metal prices. So certainly the tenor has changed in the marketplace where three months or more likely six months ago we were really concerned about price degradation, now most of our degradation over the past few months has been related to rising metal prices that we weren't able to recapture, but we're now seeing some ability to recapture those increases in metal. So yes, the tenor in the marketplace has changed from negative pressure to maybe some positive in terms of recovering metal increases, but we're not forecasting substantial improvements in margins at this point, we're optimistic that we're going to be able to offset anymore erosion if metal prices continue to rise.

That's fair. I appreciate it. When you think about general engineering you talked about restocking and real demand and there are two buckets, one when you say restocking first, I'm also thinking that was a pre-buy in that comment about restocking as well as you're going into some maintenance into 2Q. First, is that accurate, and then secondly, could you quantify the impact from both restocking and real demand.

Yes. The only quantitative measure we have actually in general engineering as it relates to the downstream restocking and destocking is for general engineering rod and bar products, which are a significant amount of the shipments that go into that product offering. We do have metrics there -- the real demand year-over-year which is what the service centers were selling to their customers was up roughly 5% year-over-year, but prior year there were substantial destocking between us and the service centers. This year, there were substantial restocking and the total for just that product line was like 16% year-over-year, demand on the mills compared to 5% real demand, now how much that translated through the rest of the product offering, we don't have that quantitatively, but certainly we think for most of the long products which is a predominant portion of the shipments that go into general engineering. We think that's same phenomenon was occurring there. So we had a lot of artificial demand that boosted those first quarter general engineering shipments. As we look at the second quarter right now, we're looking at modest year-over-year growth and that's with just real demand, but also with our capacity restricted a little bit at travel because of the construction. So we're still seeing strong demand, but not as much as was reflected in that first quarter with a huge year-over-year change in restocking versus destocking, if that clarifies or answers your question?

It does, I mean, if I can just elaborate on that a little bit, when I think about general engineering, I know you don't generally parse it out so I want to ask for the percent moves, but maybe you can kind of talk general terms about general engineering plate, was that a higher than usual quarter in general engineering plate because I know that's also manufacture at Trentwood?

Yes. The demand was strong for general engineering plate, we don't know how much of that if any was restocking. There may have been some, but we didn't get a sense that there was anything artificial in terms of anticipating our production outage as it relates to the first quarter.

Got it, that's good to hear. Thanks guys. I appreciate it.

Thank you. Our next question comes from the line of PT Luther with Bank of America Merrill Lynch. Your line is open.

Hi, Jack and Dan, how are you?

Hi, PT, good.

Hi.

Good. I want to hop over to the auto side of things if I could, Jack, you sort of I think alluded to this in your comments about potential downside where I was just wondering if you could just maybe provide a little extra context about your auto outlook and how that's squares up with recent, as we see in the auto space such as GM with some other extended holiday shutdowns and things like that or seasonable shutdowns. So wondering, if there is a way you can give us some additional context about maybe your underlying assumptions and then how it risk and how significant the risk may be there?

Yes. Our internal forecasts are still pretty consistent with what we are looking at three months and six months ago and they do reflect the current information is out there for some extended plant shutdowns in the third quarter now in GM, but on some of our products head forward we're going to see some extended shutdowns. But even with all of that, we're still seeing this year looking similar where our outlook has been for the past six months, but from a macro standpoint, we see everything that everyone else has and we've got to do with our inventories building here and sales weren't that strong in March and so there is just a lot more concern, is this going to hold up at this stage. But at this point, we don't have anything tangible to suggest a change in our current outlook.

Okay, cool. That's helpful. Thanks. And then, I was hoping you could maybe help me better understand this graph purchase boost that you got in Q1, is that something that could continue how significant that was a boost in Q1 if there is some sort of change in the strategy with what you're doing there lifting under something like that to help out the cost side.

Yes. First of all, it's not a change in strategy, we did comment, I think as long ago, it's probably the first quarter last year that we had a major initiative to improve our scrap utilization. We've continued that and got a lot of gains last year from that effort. But that was nominal impact, we were a little bit better on scrap utilization year-over-year in the first quarter, but it was marginal. The bigger impact is the marketplace and it's a typical phenomenon we had a rapid run up in the price of prime in the first quarter typically when that happens, the price of scrap lags a run up in prime and so we get a price benefit on scrap while we're getting squeezed on prime and that's what happened in the first quarter worth a couple of million dollars or a magnitude. But the same thing happens the other way. If we get plunging prime prices, it will squeeze the scrap prices because they won't move as rapidly as prime, so we get burned the other way, it's a typical market phenomenon which leads to the answer, no, we do not expected to continue, we expect what we back at equilibrium here in the second quarter.

Okay, cool. Thanks. It's helpful. And then, final one, and then, I'll hand it off. I was wondering if you could also add a little context on the share repurchase authorization, 100 million you added, you had a big boost in share buyback this year 33 million and that was opportunistic and if you have some sort of timeframe in mind for that next 100 million.

It's Dan, instead of Jack. But, we did get the authorization partly because of the pickup in the volume that we were purchasing during the first quarter and the type of program that we had in place would probably had that kind of buying volume at a similar pricing structures that we see in pricing that we saw in the marketplace. So, the pace that it depends on the price of course and it's the grid that we have established and used for a long period of time, has this buy fewer shares at high prices and more shares has been moved down. So that's consistent all along. The volume was something though that in the 70s was giving us the ability to buy around $30 million of shares. I can't predict how long the new authorization or the incremental authorization will actually take to be used because it depends what the market will be.

Got it. Okay, Dan, Jack, I appreciate it. Thanks very much.

Thanks, PT.

Thank you. Our next question comes from the line of Jorge Berenstain with Deutsche Bank. Your line is open.

Hi, good afternoon guys. I was just wondering if you could quantify the quarter-over-quarter change that we saw in margin down about 660 bps and just maybe put that into buckets as to how much was really related to Trentwood construction, how much was related to other perhaps inefficiencies and maybe lastly reduced output, so maybe just kind of help quantify what's transitory versus structural.

So, you're talking about the change from first quarter to the second quarter outlook?

Sorry, from fourth quarter to the first quarter.

Oh, fourth quarter to first quarter. Wow! Just a minute, I have to dig into my papers here for that one. And hope I have it here. I think I do. No, I don't have it here right in front of me, can't get there, right here you will have to ask some follow-up question to Melinda perhaps and she maybe able to get some additional character on that, but Dan, do you have any update there?

If you could repeat it because I'm not sure I captured it all.

Yes, I'm just trying to understand sort of quarter-over-quarter with reduction in margins, how much of that could be attributed to just temporary issues at Trentwood, how much could be related to reduced volume throughput?

Yes. Well, fourth quarter to first quarter, sales margins, I think we're held up pretty well in the fourth quarter so year-over-year we had roughly 200 bps change just in sales margins and that relates to the compression we are getting and the competitive price pressure. So 200 bps or 600 bps is there, major maintenance I would guess was fairly confident, probably higher in the fourth quarter than the first quarter, but we had some of these overhead costs and the scrap price margins were much better first quarter than fourth quarter and a lot of that were just related to the scrap price pressure, so other than that, I can't give you the detail to get that kind of a bridge.

Okay. And then, maybe you could just talk a little bit about what you're seeing happening in general engineering plate, which clearly was the upside surprise for the quarter. Is this product that goes into the -- could you talk a bit about which sectors would tend to pick that up, is that energy related or general manufacturing, why we're seeing such a strong up tick in general engineering plate?

Well, it's the broad industrial markets, but go back to my prior comments, some of that is and you're not -- you're not comparing year-over-year, I didn't know what might compares on that.

Yes, I'm just talking again quarter-over-quarter.

Okay. So year-over-year, last year we had significant destocking in the industry, this year we had significant restocking. So in one sector which is general engineering rod and bar, which is a significant portion of the shipments there, we had 5% real demand increase, but we had 16% increase in mill demand because we're comparing a restocking to destocking, okay? So, in that whole general engineering sector a lot of it was comparing a restocking quarter this year to a destocking quarter last year underlying that was single-digit -- mid single-digit year-over-year growth which we've been seeing really for the last two or three years. So that's the real component, there is strong underlying growth here, but the first quarter was inflated by restocking compared to a prior year that had destocking and so it really creates a big change year-over-year.

Okay. Thank you.

Thank you. Our next question comes from the line of Novid Rassouli with Cowen & Company. Your line is open.

Hi, Jack, Dan, and Melinda, it's Novid. Most of my questions have been answered, but just a couple of quick ones. I wanted to get your thoughts on mix progression, so now we're clearly saw a mix shift away from aero into general engineering, once we work through the aero destock, are you expecting a similar mix like moving into 2018 that we've seen over the past few quarters?

Maybe yes. Yes, although, longer term we'll see more growth in aero and auto than we see in the general engineering and other industrial. So over time we expect aero and auto to continue to creep up while general engineering and industrial will reduce as a percentage of the mix.

Okay, great. And then, more specifically, we saw value-added revenue per pounds fall as general engineering increase as a percentage of the mix. I was just wondering, we also saw general engineering specifically fall with respect to value-added revenue, was that a mix greater import pressure or can you provide the moving pieces with respect to general engineering? Thank you.

It's price and mix. So it's a combination of both and frankly it's heavily mix in the first quarter.

Thanks, Jack.

Thank you. And our next question comes from the line of Andrew Quail with Goldman Sachs. Your line is open.

Hi, Jack. Thanks very much for the update. Congrats on a pretty strong quarter. Just got a couple of questions, on that $6 million that you guys were talking about from the improved or the favorable price, but can you just break that down, I think you said a couple of million bucks, but if you don't expect, if aluminum prices are flat this quarter, I think they're up 15% from Jan 1, do you expect to see any sort of improvement on that?

Well, on the $6 million you're talking about was the combination of scrap prices overhead and major maintenance year-over-year. The major maintenance as you know is lumpy and quarter-to-quarter is going to go way up in the second quarter just because that's when the work is scheduled. So major maintenance is relatively constant and I will let Dan speak to overhead and some of those in a minute. But the other piece is, the scrap prices, I answered that, I think on a prior question. We had a couple of million dollars that was scrap price and that's just an anomaly of scrap prices lagging the run up in prime. So we do not expect that to continue.

Yes. On the overhead, I'm not really sure that we're going to see -- it was low and I think lower than it will normally be, we had some small number of items that were I call kind of unique to the quarter. But, I think that will probably see that be slightly higher as we go into the next couple of quarters.

Yes. So the point is, at a high level from a modeling standpoint, when I look at it, I back out that $6 million and I say it wasn't really a $54 million EBITDA quarter, it was $48 million quarter, when I take the anomalies out of it and say what it looks like going forward.

Yes. Thanks Jack. That's exactly the way forward. Just one more on pricing going forward, would you comment and reiterate you got in specific as a team, when do you sort of expect this -- just to start seeing the spot pricing market to firm during this sort of phase of destocking especially in euro? Is that a quarter, do you see -- you will say that Q3 or is that more something in Q4?

Are you talking price now or volume?

Price, Jack.

From a price standpoint, we were confident right now, things can change, but we are confident right now that we have bottomed out in terms of margins. We are also seeing solid evidence that we are able now to recapture run ups in the price of prime. So, if prime moves on us, we think we will be able or we are confident we will be able to recapture that which is why we are pretty confident now that the margins have bottomed out. Will they improve? That's hard to say. We are not counting on it in our internal forecast. But, we will continue to probe and if there are opportunities, we are going to get more price. But, we are not building that into our forecasts nor would we suggest anyone else built that into their forecast at this point.

Great. And last one just on the tax rate, was a little bit lower this quarter, do you expect that to go back to more of a 38 normal or is it going to stay at 34?

I would expect it to go back to the -- kind of the statutory rate, which is around 37% to 38%.

Great. Thanks guys.

Thank you. And our next question comes from the line of Josh Sullivan with Seaport Global. Your line is open.

Good afternoon.

Hey, Josh.

Yes. Just actually one on a follow up on the cash tax question there, do you guys have an estimate when you think the majority of your NOLs will be consumed just given the current rate that you are burning them at?

We don't give very firm with any kind of a forecast to that nature because it basically implies your forecasting taxable income. But, we will like to see it happen sooner than later. Obviously, we have got what was that number, $414 million of pre-tax income that was shielded at the end of December. And so, at the pace that we were going it will be a few years.

Okay. Thank you.

Thank you. I'm showing no further questions at this time. I would like to turn the call back to Mr. Hockema for closing remarks.

Okay. Thanks everyone for joining us on the call. And we look forward to updating you during the second quarter call. Thank you.

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