Good day, ladies and gentlemen and welcome to the Kaiser Aluminum First Quarter 2018 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Melinda Ellsworth, Vice President of Investor Relations and Corporate Communications. Ma'am, you may begin.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's first quarter 2018 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. 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, 2017. The Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the Company's expectations. In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items from which we have 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. Our first quarter results were driven by margin compression due to escalating metal and freight costs, growing automotive and industrial demand and continued improvement in manufacturing cost efficiency provided some benefit cushioning the margin squeeze. Higher year-over-year shipments reflected continued demand growth for our general engineering applications and continued growth in automotive extrusions which more than offset the impact from continued destocking in the commercial aerospace supply chain. Despite the higher shipments value-added revenue declined slightly due to a lower value added product mix, as well as a significant increase in contained metal costs that squeezed value added prices on certain noncontract shipments. Overall market conditions are improving as aerospace supply chain destocking begins to moderate and we have initiated pricing actions to mitigate the margin squeeze from rising freight and metal costs. We will continue to pursue additional actions as required to address these rising costs. During the quarter we benefited from the additional capacity and improving cost efficiencies from our recent investments at Trentwood which served to partially counteract headwinds experienced in the first quarter. We're continuing to work through installation of handling equipment at the light gauge plate furnace and expect increasing benefits as we complete the projects and implement practice changes to realize the full potential of the investments. Before discussing our outlook, I’ll turn to Dan for additional color on the first quarter. Dan?

Thank you, Jack. Compared to the prior year, our first quarter 2018 shipments were 2% higher and total value-added revenue was 1% lower reflecting continued growth in lower value-added automotive and general engineering shipments, and softer aerospace demand due to continued supply chain destocking. In addition, value-added revenue compressed in the first quarter on certain noncontract sales due to higher year-over-year contained metal costs. Value-added revenue for aerospace applications declined 5% in the first quarter of 2017 on a 5% decline in shipments, as well as price pressure on certain noncontract sales. Automotive extrusion value-added revenue however improved 3% from the prior year quarter on a 5% increase in shipments driven by strong double-digit growth in bumper programs. General engineering value added revenue improved 6% on a 4% higher shipments compared to the first quarter 2017 as we were able to capitalize on continued strong general engineering demand due to incremental capacity from last year's investment at our Trentwood facility. First quarter 2018 EBITDA was $48 million down from $54 million in the first quarter of last year. This decline was due to rising contained metal costs, as well as the increase in freight costs that Jack mentioned which were partially cushioned by improvement in underlying manufacturing efficiency. EBITDA margin was 23.8% compared to 26.6% in the prior year quarter. Turning to Slide 7, as reported for the first quarter consolidated operating income was $37 million, net income was $26 million and earnings per diluted share was $1.51. This compares to operating income of $9 million, net income of $36 million and earnings per diluted share of $2.04 in the prior year quarter. The prior year period included $15 million of net non-run rate gains predominantly non-cash mark-to- market gains on hedging positions. Adjusted for non-cash non-run rate items, first…

Thanks Dan. Turning to Slide 8, demand for our automotive and general engineering applications is strong and aerospace demand is strengthening as the supply chain destocking we've experienced over the past several quarters is beginning to moderate. Confirming the strengthening demand, our leadtimes for plate products have expanded from approximately 10 weeks earlier in the year to approximately 20 weeks. Meanwhile primary aluminum prices have been trending steadily higher over the past two years more recently, Section 232 tariffs and sanctions on Rusal have caused additional aluminum price volatility. The current squeeze on value-added revenue and sales margins results from a lag in passing through higher costs on certain noncontract high value-added products. We've experienced this in the past when market conditions were similar. Last year we discussed the market environment that drove our sales margins to a level comparable to the historic lows of 2014 when conditions were similar with aerospace destocking combined with escalating contained metal costs. In the first quarter, we experienced similarly unfavorable market conditions intensified by additional cost pressure from higher freight costs. As a result first quarter sales margins were even leaner than we experienced in 2014. The recent introduction of aluminum tariffs and sanctions have created significant short-term aluminum price volatility. As we indicated during our fourth quarter earnings call, we believe that the long-term impact of Section 232 tariffs for Kaiser will be relatively neutral to positive. For our foreign sales virtually all shipments are covered by long-term contracts with provisions to pass through U.S. metal prices. For our domestic shipments, industry practices the pass-through contained metal costs although there's typically a lag on certain high value-added noncontract products as evidenced by the margin squeeze in 2017 and the first quarter. A potentially positive consideration is the tariffs implemented on products imported…

[Operator Instructions] Our first question comes from Edward Marshall with Sidoti & Company. You may begin.

So I want to get your perspective on pricing. I would imagine that a rising environment such as we had would allow you to catch your pricing a lit bit easier than the environment we've been in recently. Could you quickly comment on that and then I have a second follow-up.

You broke up a little bit there Ed but I think I got most of your question. I think you inferred that the environment is improving and one of the statements that we just made in my remarks here is the manifestation of that our lead times on plate products which were approximately 10 weeks or less a few months ago have expanded now to 20 weeks which shows a broad strengthening in demand for our plate products across the board which obviously creates a more favorable environment from a pricing standpoint. We implemented well I’ll characterize as some modest price increases that became effective on April 1. We implemented some not so modest to pretty aggressive price increases that will take effect on May 1. We're confident that those will stick in the marketplace. As we said we may suffer some short-term volume dilution from that although we think that will be modest but we’re going to stick with these price increases. We've seen the marketplace accept these pretty well.

And I guess the last time you saw this type of inflation in the material cost in 2010, it look like quickly subsided and then value added per pound stayed up for a significant period of time. Was there something unusual in that or pricing trends to be a little bit sticky after the inflation?

The best comparison to what we’re experiencing over the last 15 months or so is actually 2014 where we had a similar situation with sharply rising metal prices over an extended period of time in conjunction with aerospace destocking which created slack in demand for all aerospace products and plate products in general. So - and we reached historic lows in terms of our sales margins in 2014. Last year we commented a few times on earnings calls that we had sales margins that were approaching that 2014 low and then the rapid run up in metal prices we saw plus the freight cost expansion that we saw in the first quarter as a consequence of federal regulations further exacerbated that situation and really hammered us in the first quarter. But as I just indicated in the prior answer, we’re seeing strengthening demand and we’re seeing now the ability to get price increases to stick and we’ve moved pretty aggressively here. So we expect that we’ll see improvement as we go forward and we’ll continue to act proactively depending on the situation here to get our margins back up.

Finally I just wanted to ask about the 2019 auto launches and programs. I think you typically talk about 5% to 6% penetration rate over production. Does that increase in 2019 as a result of the new programs, are these cannibalizing existing programs?

There will be a lot of new demand there more than just replacements, I’m not ready to quantify what that is at this stage because when you go through a big launch here, there are lots of variables that get involved. So as we get into February we’ll start to put some additional color on that, but I'm sure I'll give you plenty of caveats because launches are really, really uncertain until things settle down.

Our next question comes from Jeremy Kliewer with Deutsche Bank. You may begin.

Just a follow up on 300 bps margin squeeze that you announced in your prepared remarks. How much of that was at the end of the quarter versus now the built up through March considering the prices have increased in April as well?

It was actually pretty consistent through the quarter the metal price spiked up in January and it was only - it only changed a penny or so month-to-month as I recall during the quarter. And the same with freight costs, freight costs got hammered immediately because the new federal regulations took effect on January 1. If you bifurcate the 300 basis points it was really roughly 200 points on what our typical margins over metal and it was another 120 points from freight. So we really got hammered with freight as well it was a combination of the two that it was a combination of two bad worlds, world factors there in the first quarter.

And then with regards to Russia and Rusal, are you procuring any of your mental units from them and do you have to replace those or you see any kind of issues moving forward following the October, kind of cut off to get aluminum to where you need?

We buy from a number of global sources so we don't really disclose what our mix of suppliers are, but to the real point of the question we’re very confident that our metal supply is secured as we go forward.

Our next question comes from Novid Rassouli with Cowen and Company. You may begin.

Just wanted to start with the pricing increases Jack you were mentioning some of them become effective on April 1 and then it sounded some more aggressive ones become effective on May 1. I just wanted to get a sense is that are those try to build in the price increases that we saw in the first quarter is that what those are attacking?

You mean the cost increases.

Yes right cost increases.

It’s reflecting a number of issues here, we included a chart on the market environment slide here during my remarks that shows the metal price going back to 2016 and you can see it's been steadily increasing since early 2016. So we've got - we’ve got more than two years now of increasing metal costs and then we got hammered by freight costs and we had an unfavorable environment to really get pricing because of the aerospace destocking. So we made some moves to capture some of metal on April, but as we saw the complete magnitude of the freight and everything else and the really strengthening demand we made some pretty significant moves here in May. But to quantify it I don’t want to quantify it at this point it's hard to pick a point what we’re comparing to we’re just looking at what we think are realistic pricing moves based on what's happening to our costs and what the market environment is the capacity to receive price increases.

Right so I guess what I was trying to really focus on is your guidance I mean if we look at all in costs for the first quarter the delta relative to the fourth quarter is actually smaller than the delta if you take the quarterly average for the second quarter thus far. And we say that where prices end up the delta is actually larger from 1 to 2Q and so I’m just trying understand the pricing the lags on your pricing increases because it just seems like I’m not sure what the offsets would be, but it seems tough for margins to improve materially in the second quarter given the dynamic that we’re seeing primarily it seems like because Rusal. And so I’m just trying to make sense of your guidance if we’re in this range that we saw in the first quarter, in the second quarter that would mean that margin would really need to pick up in the third and fourth quarter just to get to the bottom range of that guidance and so I’m just trying to understand the puts and takes there of how we get there?

There are number of factors when you start looking at quarter to quarter you get wide swings in major maintenance costs when you compare quarters that has a big impact on margin. There are impacts from part number mix that were supplying and customer mix inside those major product lines and I really didn't refer to it, but some of the margin compression that we had in the first quarter we had an unusually lean what I'll call part number mix even on some of our contracts the mix that came through the orders were leaner than we typically experience. So we kind of had a combination of a lot of negative factors in the first quarter. We’re pretty confident that's going to be as bad as it gets in terms of sales margins, but they're just so many factors in there and I don’t want to give any guidance on the second quarter at this point. I just point out that we’re moving aggressively and we still feel comfortable holding to our 2018 full year forecast.

And then last question the price increases - those lags how long will it take for those to kind of show come through to the P&L for us to see?

They’ll come through immediately as I said we raised prices effective April 1 what I characterized is relatively modest price increase. And then we passed through a much more aggressive price increase that will become effective May 1 unlike some others in our space. We're implementing it on orders already on the books so they're taking effect immediately and we’ll see that effect immediately. Also contrary when you start listening to other earnings calls versus ours there's one huge difference virtually all of our competitors use their cost on a FIFO basis and we cost on a LIFO basis. My establish that policy more than 20 years ago intentionally because I wanted pressure on our product managers when costs are going up I wanted them to see the immediate impact on their margins. So they had intense pressure to move their prices some of our competitors don't have that same kind of incentive for they can live on three or four month of metal costs.

Our next question comes from Curt Woodworth with Credit Suisse. You may begin.

So I guess with respect to the May 1 price hike, if that goes through will that cover you relative to where you see the contained metal pressure today?

It gets back to compared to what…

The 300 basis points of headwinds in 1Q given the May 1 hike which you said was pretty substantial, would that recapture that contained metal margin pressure?

I don't want to go there yet - we just have to wait to see what happens to mix to how much total acceptance we get in the marketplace because we put some pretty aggressive price increases out there. And we don't know - there are some competitors out there who may be capricious and we’re not going back off from these price increases so they may try to book some short-term orders and we're going to hang in there so we may lose some volume. So they’re just too many factors involved right now to predict what the short-term impact will be. We’re just confident that over the long-term we’re going to get this back in equilibrium where it belongs.

And then last year you talked about scrap spreads being a decent size tailwind into the business and spreads have widened out a lot. Year-to-date can you comment on what the scrap spread benefit was to even in the first quarter?

It was exactly the same the margin - the sales margin benefit from what we characterize as metal profits which is essentially the scrap spread was exactly the same as the last year average for the full year and the first quarter of last year.

Why would that be spreads have widened out pretty significantly year-on-year?

Well it depends on what spreads you're talking about or what you're reading. Again, you have to remember, we're variants and in a very narrow slice of the market and we're in high performance alloys typically. So when you read those scrap spreads and I read some of those scrap spreads to they have absolutely no correlation necessarily with what we’re seeing on scrap spreads.

What’s your mix between Ingot or cast house product versus scrap across your system?

It varies product by product, plant by plant in terms of what our consumption is but our scrap utilization in the first quarter was very consistent with what it was first quarter a year ago and then throughout the year last year. We mentioned last year that we made a significant gain increasing our scrap utilization we basically held that in the first quarter. And frankly a little surprising to us we expect widening spreads but we’re on the mix that we buy, we did not see wider spreads in the first quarter.

And then just one last one can you comment on the M&A environment, obviously there has been speculation with [Alaris] and adjustable products in general view. Would you say your pipeline is more full than it’s been can you comment on sort of your appetite to just potentially…

I don’t think there is any real change in that environment we’re not seeing more or less activity and we’re certainly not seeing anything other than expectation for outrageous multiples that we won't pay.

[Operator Instructions] Our next question comes from Piyush Sood with Morgan Stanley. You may begin.

First question, staying on the raw material mix, how effectively are you able to pass through boots, regional premiums unshaped premiums?

Piyush, could you repeat that again for us please.

How effectively are you able to pass through both regional premiums or unshaped premium either pass them through or hedge amount?

Regional premiums or and what premiums?

Shape premiums so slab premiums, billet premiums?

We pass through the LME plus the Midwest premium the U.S. Midwest Premium. So all of our contracts are predicated on passing through the full U.S. cost of prime. We do not make any distinction for what our scrap utilization is we pass through the cost of prime that’s built into our pricing structure. On freight you didn’t ask about freight but I’ll comment on freight. Freight affects our entire product mix not just noncontract. We don't pass through freight cost on our contracts as well. So that's an impact across the board and something that we’re looking to address with the price increases that we’re implementing effective May 1 as well.

And what about passing through any kind of billet up-charge or slab premium which is over and above the Midwest Premium.

Yes, we basically manufacture all - we buy prime and scrap. So we make all of the billet and ingot in-house with some minor exceptions. We have a little bit of purchase material, but it's negligible. So, we really don't have an issue on that. We’ve seen the widening spreads on in the open market on ingot and billet.

That’s good to know and the question on the new revenue recognition standard. What was the either the headwinds or tailwind to EBITDA in 1Q and if you’ll able to quantify it?

Yes, if you were to compare this as we reported to what it would have been if we've been using the old standard or EBITDA is favorable now to what it would have been by about $1 million. And the revenue, net revenue was about $2 million again favorable under the current recognition that would have been on this prior recognition.

Our next question comes from Josh Sullivan with Seaport Global. You may begin.

Is there any way to characterize how you see the moderating of the aerospace destocking through the year. Is that more from an acceleration of customers taking the product or just - have inventories finally hit that point where there is less slack?

I think it’s a combination of the two. They’re continuing to ramp up their build rates and the inventories beginning to deplete. And again it's the best way we can measure right now is the fact that our lead times have doubled here with the past few months.

And then you also mentioned you had some pickup at Trentwood capacity this quarter. How should we think about the additional gains just through here on Trentwood, as some of these projects finish up or should we look for more capacity or more margin focus through rest of 2018?

We got a lot of the - I’ll say we got a bump based on the investments that we made last year just from the equipment that we installed but we’ll continue to get additional capacity benefits as we revise our manufacturing practices, the rolling practices, to manufacture the products and that will be over the course of several months or perhaps even into 2019 before we completely get our practices fine tuned to take full benefit of the capacity and the cost efficiency whether we should get from this. So we expect we’re going to see continuing growth and benefits from the Trentwood investment over an extended period of time.

Thank you. And I'm currently showing no further questions at this time. I'd like to now turn the call back over to Jack Hockema for closing remarks.

Thanks everyone for joining us on the call today, and we look forward to updating you on our second quarter call in July. Thank you.

Ladies and gentlemen, this concludes today's conference. Thanks for your participation. Have a wonderful day.