Good day, ladies and gentlemen and welcome to the Kaiser Aluminum Fourth Quarter Full Year 2018 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 be given at that time. [Operator Instructions] It is now my pleasure to introduce Vice President, Investor Relations and Corporate Communications, Melinda Ellsworth. Please go ahead.

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum’s Fourth Quarter and Full Year 2018 Earnings Conference call. If you have not seen a copy of today’s earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are 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 when filed the company’s annual report on Form 10-K for the full year ended December 31, 2018. 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, 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 reported strong results for the fourth quarter, the second half and the full year of 2018, consistent with our initial outlook and despite headwinds from aerospace supply chain de-stocking and high contained metal freight and tariff costs. Before getting into the results, I’d like to reflect quickly on our end markets. Commercial airframe builds were another record in 2018 and supply chain de-stocking began to moderate in the second half, further accelerating aerospace demand growth. Aluminum extrusion content continued to increase on solid North American automotive builds and demand for general engineering and industrial products remained strong throughout the year with normal second half seasonality. Turning to slide 6 and a recap of 2018 results. We have achieved a number of important milestones, including record shipments, record value added revenue, near record adjusted EBITDA and record adjusted net income and adjusted earnings per share. In addition, consistent with our capital allocation priorities, we continued to invest in our platform with $74 million of capital expenditures for efficiency, quality, capacity and operational security projects, invested $43 million to acquire Imperial Machine & Tool, a leader in multi-material additive manufacturing and machining technologies and returned approximately $100 million to shareholders through share repurchases and dividends. In addition, in early 2018, we raised our quarterly dividend 10% and in early 2019 for the eighth consecutive year, we increased it an additional 9%. 2018 results were excellent, especially considering the headwinds. Without the $3 million of tariff costs, EBITDA also would have been a record in addition to all of the other record results. However, we’re often asked by investors why EBITDA and EBITDA margin hasn’t improved since the record year in 2016. The answer is simple. While our 2016 results were…

Thanks, Jack. As Jack mentioned, strong demand across all end users supported shipment growth of 4% in 2018, leading to record shipments of 652 million pounds. Those strong shipments drove us to record value added revenue of $828 million, which was a 5% year-over-year improvement. Value-added pricing improved over the course of the year after difficulty recovering high contained metal costs early in the year and market conditions finally allowed us to lead price increases in the second quarter that we fully benefited from in the last half of the year. Aerospace value added revenue improved 6% year-over-year on a 7% increase in shipments. Continued growth in underlying demand, moderation in aerospace supply chain destocking late in the year and incremental capacity from recent investments at our Trentwood rolling mill led to record aerospace shipments for the fourth quarter, second half and the full year of 2018. Automotive applications value added revenue declined 1% in 2017 despite a 3% increase in shipments, reflecting a lower value added product mix weighted more toward crash management systems. General engineering value added revenue for the full year improved 8% to a record $233 million on a 1% increase in shipments, which reflected a higher value added mix and improved year-over-year pricing. Turning to slide 16. EBITDA of $205 million in 2018 was a $6 million improvement over the prior year and just shy of our record EBITDA of $207 million in 2016. Solid underlying demand across all our end users led to favorable volume and mix related impact of $21 million compared to the prior year. This was partially offset by a combined $14 million adverse impact related to pricing and tariffs. At the start of 2018, our sales margins had compressed to unprecedented levels due to a spike in underlying metal prices…

Thanks, Dan. Turning to slide 24 and a summary of our comments, despite formidable headwinds in 2018, we achieved record shipments, value added revenue, adjusted net income and EPS and near-record EBITDA during the year. While 2019 will present challenges, we expect that growing demand for our Aerospace products, combined with improved non-contract pricing will drive record results. As we look longer term, we remain well-positioned in attractive served markets to capitalize on the secular demand growth for our aerospace and automotive applications. In addition, we expect to continue steady improvement in underlying manufacturing cost efficiency to further drive value for all of our stakeholders. Our strong balance sheet and cash flow generation will support our growth and capital deployment priorities and provide sustainability through industry cycles. We’ll now open the call for questions.

[Operator Instructions] And our first question comes from the line of Jeremy Kliewer with Deutsche Bank. Your line is now open.

Hi, good morning.

Good morning.

That’s a good quarter. You guys have been very consistent on stating that Aerospace supply destocking is ongoing and now it’s been moderating over the past couple of quarters. One of your largest partners or customers, Reliance earlier stated that the plate market is very tight. So I’m wondering If you could provide a little bit more insight as to which of your aerospace products are actually tight versus others that still have some room to do some moderated destocking?

There were several parts to that question, but let me just speak from an overview standpoint. Demand for plate products is very strong in both aerospace and general engineering and all of the production for those products goes across the same fundamental equipment, goes through the hotline and goes through the same heat-treat furnaces. The destocking situation began to moderate late in 2018. We see it moderating further in 2019. However, there will be destocking continuing in 2019. So in terms of segregating what the impact is, frankly, we’re seeing strong demand across the board. Strong demand for all of our aerospace products and that’s not just plate. Reliance may have made some comments about plate. But we have the same situation with or drawn to by our aerospace shapes, extrusions, cold finished rod and bar, it’s really across the board. Really, really strong demand and the same thing for general engineering products across the board, not just plate, but also our long products. So we’re in a really good period right now with really strong demand across the board.

Good to hear. And then on your capital allocation [indiscernible] you guys have done a lot of share repurchases blatantly and you really picked it up in the fourth quarter as appeared that your share price kind of sold off there, so how should we think about that moving forward now that your share price is close to your all-time highs.

Well, our program is designed as we’ve said many times before that we would -- so that we will buy more at lower prices and fewer shares at the higher prices has been consistent way we bought for the entire duration of our program going back 4, 5 years. So I think it would just be a similar kind of expectation that we would not probably buy as many in the current price environment than we would if we -- that we saw in the fourth quarter.

Thanks. I’ll jump back in queue.

Thank you. And our next question comes from the line of Martin Englert with Jefferies. Your line is now open.

Hi, good morning, everyone.

Hey, Martin.

Good morning.

So following the Trentwood outage, do you anticipate any incremental capacity from de-bottlenecking on any of this work that you’re planning in 2Q here?

No, it’s -- this is fundamental maintenance and casting, it’s a rebuild of a major casting, our largest casting complex at Trentwood. Its major work on the big reversing mill but just typical maintenance work, just restoring the equipment to good condition and the same with our stretcher, our large plate stretcher has significantly more volume go through it than we anticipated back 10 years ago when we installed that equipment and this is routine maintenance, just to go in and replace some of the parts that are showing wear and tear after 10 years of -- or 12 years of really, really high volume going through there.

Okay. And what’s the exact timing during 2Q or dates that you have [indiscernible] where you start and anticipate completing this?

I’m not going to go to the specific dates, but it’s during May and June.

Okay, thank you for that. And then maybe, if you could just talk about the lead times for aero heat treat plate and if you have any excess availability for 2019?

Yes, actually, we basically are booked in 2019, book doesn’t mean that we have orders for all of 2019. So lead time has become a bit of an anomaly in the current conditions. We have partnerships with a number of customers. And so we have capacity blocks for those specific customers. But at this point, there’s really not room for drop in business from customers other than those who are our long-standing partners.

Okay, so fair to say that it’s largely blocked off on allocation or allocated for your long-term contractual customers for 2019, correct?

Yes. We don’t like to use that word allocation, but we’ve blocked capacity for our strategic partners.

Okay, that’s helpful. And broadly, what are you seeing from commercial aero customers regarding the materials, requirements for 2019. I imagine they probably came back to mid or late last year with an ask as far as the volumes and how does that look?

It varies by customer, but I’ll go back to the general comments, we are seeing increasing demand overall, and it’s a combination of commercial and military demand, but we do know from what we hear from certain customers in terms of what their take will be that there still is an element of destocking that’s perpetuated through 2019 and who knows where we’ll go after that.

Okay. And is this destocking that’s occurring, is that more at the OEM level -- just inventories of plate products and/or finished pieces or parts that’s occurring there or is it somewhere else in the supply chain?

No. It’s definitely at the OEM level and it continues to have the same genesis, which is the changing outlook for some of the wide bodies in particular, there’s been a lot of news about the A380 but changes in forecast builds for some of the wide bodies that has created some of the overstocking and now the destocking.

Okay, excellent. Thanks for that color.

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

Hey, good afternoon.

Hey, Josh.

Just digging into the 2019 as a transition year for automotive, you’ve talked about that before. But is there anyway to quantify the number of programs rolling off versus the number of ramping up and maybe what the cadence looks like throughout the year?

Yes. It’s -- in terms of quantity, I mean it’s not in the teens, but it’s approaching that level. So a number of programs on both sides and frankly in terms of timing, I wish I knew, no one knows and that’s why we put so much uncertainty on this. There are just so many variables involved, a lot of times, in fact, some of what we saw in the second half was actually some end of life programs that ended sooner than we expected and there may be more that or some of the end of life may extend to beyond what we’re currently anticipating, and then we put narrative in the earnings release and in my comments here about the uncertainty and a launch, there are so many variables involved with numerous suppliers with the processes, internal to the OEMs, as they launch a new model and then the question whether the dog is going to eat the dog food, so once they launch the vehicle.

Got it. Got it. And then on the CapEx outlook for $80 million to $90 million. You mentioned some priorities in the prepared remarks there, but what you see is the most valuable projects in there going forward?

Well, in terms of value, they’re all valuable or we wouldn’t be doing them. Those that create efficiency or quality or capacity have good solid returns. The ones that are operational security are critical to maintaining our position and keeping our equipment in good operating conditions. So, it’s really important and frankly, we’re seeing a migration to more operational security than what we’ve had in the past, we still look at roughly 75% of depreciation as our long-term operational security level, but we’ll probably be a little bit above that in the 2019 period and maybe more than that in 2020. We’ve got some significant programs coming up that we will talk about more later as we get those well defined but some pretty significant investments that are primarily operational security, but they also have efficiency and capacity benefits.

And then just one last one on the price increases here for ‘19. You think that the benefit will follow the cadence as it did in ‘18 or has there been any change in the customers’ willingness to absorb the new price increases here?

Well, we pass through price increases on certain aerospace and general engineering products in January and February, those were successful. As we’ve said all along, we continue to monitor market conditions and whether that means more price increases as we go through the year or not, we’ll just see what those conditions are. We’re not in complete control of this, we have competitors and we have customers. And so we monitor the total market conditions and typically we’re the ones taking the lead, but we’re doing it based on our market intelligence of when and if we think is the right time for additional price increases.

Got it. Thank you for the color.

Thank you.

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

Hi, Jack, Dan and Melinda, how are you? Good morning.

Good. Ed.

So, I wanted to pick up on price again. When you started in 2018, you had a minor increase and then second quarter, you called what you characterized as significant. As we kind of look at the new round of price increases and maybe some more to come, looking at the umbrella of kind of new competitive dynamics around -- maybe around tariffs and so forth and using that umbrella to push some price, I’m curious, could you give a sense of kind of the order of magnitude of some of these increases that are coming through either quantify or qualitatively kind of talk about maybe some of the increase?

Sure. You’ve opened the door for me to talk about my favorite chart which no one’s mentioned so far, which is the 2016 to 2018 bridge that shows the magnitude of the pricing impact, almost $50 million, people ask us why is your EBITDA flat for 2 years. Well, we’ve been hit with $50 million of price reductions in 2018 versus where we were in 2016. Where we are now after the increases in the second quarter last year and the increases in January and February, we’re roughly midway between the pricing that we had in 2016 and the pricing that we had for the full year of 2018. What’s normal, we don’t know yet, but we think normal prices should still be above where we are today, whether the market will bear that, time will tell.

Got it. And any sense for contract business, I know that these price increases have really been targeted toward spot, but as you think about maybe some of your contract business and what’s up for renewal 2019 or beyond? Kind of any sense that you may be able to push some price through to the contracts side?

Those big customers are pretty friendly -- so [indiscernible].

If I look at your EBITDA outlook, and I just want a point of clarification, the greater than 25%, first, that’s a good number, but my sense is that’s not adjusted for two things, the $2.5 million recapture of the recharacterization of the tariff and then the $15 million from Trentwood. So if I adjust and look at the normalized number, that rate well exceeds 26%. First, is that accurate from -- okay?

Yes. I put -- you’re correct in that the tariffs are, at this point, we’re assuming that we’re not getting relief on the tariffs, even though we think we have a really, really strong case, don’t know why we don’t have a decision yet, but we expect to get one sometime relatively soon, but that’s embedded in our outlook. The bigger piece of those, the $15 million at Trentwood and if you just do simple math on that, that’s 150 to 200 basis points and it affects -- and I tried to stress it in my voice when I was going through that in my prepared remarks, but that’s a combination of cost, but it’s also lost sales opportunity. So our value-added revenue would increase and our shipments would increase more than we’re saying now, did we not have this one-time impacts of the Trentwood and we’d be looking at an outlook on margin, probably 150 to couple of hundred basis points better than what we suggest here.

Got it. And so if I look at the buckets of volume and spreads over scrapped efficiencies in manufacturing and price, I guess two questions there. One, what would be the most significant driver to that EBITDA walk and then secondly, what would you probably be most worried about the riskiest element of those buckets.

Well, the big issue is price. I mean, if you go back to that, the EBITDA walk slide, it’s a huge number. Embedded in that volume mix cost bar that we show is operating leverage, is manufacturing efficiency, but it also includes in contrast to the price squeeze we have on our sales, we have benefited from enriched spreads on our scrap purchases and that’s roughly 25% to 30% of the price impact year-over-year. So, favorable scrap purchase price has helped us offset the unfavorable selling prices that we had going forward. We are hopeful that we maintain those scrap spreads although they’re at unusual highs, but they’ve persisted there for a sustained period of time. So we’re hopeful that we’re able to hang on to those scrap spreads, but beyond that, it’s just continuing to whittle away at the operating leverage we get from our sales growth and just steady day to day improvements in our manufacturing cost efficiency.

Great. And then the final one from me is really just a follow-up on Martin’s question earlier, we talk about kind of the aerospace supply chain and how they’re preparing and where they’ve come from and as I look forward, there was a pretty big aircraft coming out relatively soon, I guess, first flights coming in ultimately delivery, do you think that the supply chain is adjusting for that as of yet or is that a late 2019 early 2020 event that might be coming down the pipe and ultimately higher demand for you.

Well, I think it’s built into, as I commented to Martin, I think it’s built into the destocking that we’re seeing continue in 2019. That’s already -- whether it’s embedded all of the A380 cutbacks or not, I don’t know, but it certainly has considered a significant cutback in the A380 and where we go from there, I mean, the flip side of that is they still have more seats that they need to put in the air. So if they’re not building the A380, that means they’re building a lot more single aisles in some of the wide-bodies. So we’re still seeing strong underlying demand growth, but we still -- we continue to have this anomaly that no one likes, including us, which is these destocking and restocking cycles, but unfortunately that’s just the nature of the business.

Right. You’re looking at it from the opposite direction. I’m looking at the 777X, I guess I was -- try not to say the aircraft out loud, but 777X.

Yes, but it’s the same situation. So they may have to pare back some inventories for one model, but that will result in increased builds on other models, so it just -- it keeps moving around, and that’s why for them, their bills continue to increase at a nice straight line, but for us because of the long supply chain, we get things ramping up and ramping down and it creates a lot more volatility in our shipments.

Great, thanks for all your time, I really appreciate it.

Okay, Ed.

Thank you. And our next question comes from the line of Martin Englert with Jefferies. Your line is now open.

Thank you for the time on the follow-up, any idea in today’s dollars, how much it may cost to build a facility like TrentWood.

Yes. We’ve not done a detailed analysis of that, we’ve looked at a new rolling mill for other products and other purposes, but it would be well north of $1 billion.

Okay. Pretty significant. And when you -- you’ve focused a lot on shareholder returns with the dividend and buybacks as well as internal growth in other initiatives, with the CapEx there. How are you thinking about inorganic growth looking forward here?

Remains the same, we’re very confident that our business model in the core businesses that we’re in will continue, and I stress continue to generate very strong returns for our shareholders as we have for the past 10 years and we frankly look out 10 years plus with our Board. And the Board and the management remains confident that we can deliver strong returns over the long term without inorganic growth. That said, we continue to look for inorganic growth opportunities, complementary acquisitions in businesses that we understand that most importantly will create value for our shareholders and we are not going to chase some of the outrageous prices that some of our peers have paid for assets at levels we wouldn’t pay.

Do you have any broad framework of how you think about reasonable purchase prices versus unreasonable, like are you thinking about like a through cycle forward-looking EBITDA generation and some multiple on that, excluding or including synergies?

Yes, we actually -- we will talk about EBITDA multiples, but the reality is we will -- when we look at an acquisition opportunity, we do a long-term forecast and do a discounted rate of return on it and make our decisions on a discounted rate of return compared to cost of capital and factor in what kind of a risk premium would we need for this particular asset.

Okay. Interesting. Thanks for the color there and congratulations on the strong results.

Thank you.

And that concludes today’s question-and-answer portion. Now, I will turn the call back over to CEO, Jack Hockema, for closing remarks.

Thanks everyone for joining us on the call today and we look forward to another update on our first quarter in April. 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.