Good day, ladies and gentlemen, and welcome to the Kaiser Aluminum First Quarter 2019 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 remainder this conference is being recorded. I will now like to introduce your host for today's conference. Melinda, you may begin.

Good afternoon, everyone, and welcome to Kaiser Aluminum's first quarter and 2019 earnings conference call. If you've not seen a copy of our earnings release, please visit our Investor Relations page on our Web site 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; Senior Vice President and Chief Financial Officer, Neal West; and Vice President and Chief Accounting Officer, Jennifer Huey. 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 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. Welcome to everyone joining us on the call today. Continuing the positive trend from the second-half of 2018, we reported strong first quarter results driven by improving aerospace demand and higher value-added prices for our non-contract business. The strong sales results were partially offset by approximately $5 million of cost and efficiencies at Trentwood. Compared to the strong run rate in the second-half of 2018, value-added revenue increased another $11 million, and EBITDA increased $5 million, despite the cost and efficiency at Trentwood, which was related to a combination of unplanned equipment downtime that temporarily interrupted our finishing operations and purchased rolling cost necessitated by planned casting furnish rebuilds. Improved value-added pricing was an important driver for our first quarter results, as our proactive pricing actions have successfully restored our sales margins to a level consistent with prior experience under similar market conditions. Turning to slide six and the current business environment, the temporary reduction of Boeing 737 production from 52 per month to 42 per month before ramping up to 57 in September has introduced uncertainty regarding industry demand for our products. Boeing has indicated a focus on the health of the supply chain during this period of reduced production. In other words, the supply chain is producing at a pace higher than the Boeing build rate. While it is likely that this supply chain restocking while 737 build rates are low could eventually lead to some level of supply chain de-stocking. The impact and timing are uncertain until the 737-MAX is recertified. Meanwhile, demand for military aircraft continues to grow for the F-35 Joint Strike Fighter and the modernized F-15 super fighter and F/A-18 Super Hornet. For our automotive applications, underlying demand remains strong. As a reminder, 2019 is a transition year with numerous end-of-life programs…

Thanks, Jack. Turning to slide nine, value-added revenue for the first quarter of 2019 increased $16 million or 8% to $218 million and a 2% decline in shipments as compared to the prior year quarter. Looking at our end markets, value-added revenue for aerospace applications increased - approximately 17% from the first quarter of 2018 and a 17% increase in shipments reflecting a strong underlying aerospace demand and moderating aerospace supply chain de-stocking. Value-added revenue for our automotive extrusions declined approximately 15% from the prior year quarter, and a 4$% decrease in shipments. The decline in shipments reflects that the winding down of end-of-life automotive programs and lower wire reflects the trend to lower value-added mix. Value-added revenue for our general engineering applications increased approximately 2% and a 15% decline in shipments compared to the first quarter of 2018. While fully benefiting from the price increases implemented in 2018 and of early 2019, as previously mentioned we reallocated a portion of our heat treat plate capacity from general engineering to aerospace plate to meet the strong aerospace demand. EBITDA for the first quarter of 2019 of $56 million increased approximately $8 million or 17% compared to the prior year quarter. The increase in EBITDA reflect a higher value add revenue in pricing and non-contract sales partially offset by the higher costs associated with purchasing it and unplanned downtime in Trentwood as Jack mentioned in his earlier comments. EBITDA margin in the first quarter of 2019 increased a 190 basis points to 25.7% compared to 23.8% in the prior your quarter. Now turning to slide 10, consolidated operating income as reported for the first quarter 2019 was $43 million, net income was $28 million and earnings per diluted share was $1.71. These results compare favorably to reported operating income with $37…

Thanks, Neal. Through the slide 12 and a summary of our comments today, we delivered strong first quarter results driven by improved aerospace demand and non-contract value-added pricing. Although the 737 max situation has introduced additional uncertainty to our overall outlook for 2019, we continue to anticipate improved year-over-year results. As we look longer term, we remain well-positioned to capitalize on the secular demand growth for our aerospace and automotive applications. In addition, we expected continued steady improvement in underlying manufacturing cost efficiency to drive additional value for all of our shareholders. Our strong balance sheet and cash flow generation support our growth and capital deployment priorities and provide sustainability through industry cycles. We will now open the call for questions.

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

Hey. Good morning.

Good morning.

Looking for a little additional color on - some of your industrial pricing, you talked about a 30% year-over-year, I don't know, is that due to a product mix, or is it more on - supply side constraints that it may be switching off to different industries or something along those lines?

No, there's some mix in there, but most of it is just a raw price increases, where prices had become extremely compressed on non-contract business a year ago in the first quarter, and we passed through price increases in second quarter last year, we passed through additional price increases in January of this year. And so, we have our sales margins and including covering the additional freight costs that we commented on last year. We now have our sales margins back in this territory that's typical for this kind of business environment.

All right. So we should anticipate those should continue?

Yes.

All right. And then if I may, on the unplanned downtime at Trentwood is about $5 million cost this quarter, but you kept your $15 million headwind for 2Q unchanged. So will there ever be kind of a release of that $5 million - like less CapEx spent in 2019 or beyond?

No, the first quarter was completely unrelated to the second quarter. Roughly a third of that $5 million in the first quarter was related to purchasing, rolling ignite again outside purchases of rolling ignite, while we were rebuilding casting furnaces, and we have additional casting furnace rebuilds in the second quarter. So that there's that impact, but then the bigger impact roughly So there's that impact but then the bigger impact roughly two-thirds of it was related to extraordinary costs created by significant downtime that we had on major handling equipment in our finishing operations that basically seized our operations there for several days and then we, there was a lot of maintenance cost involved to get back online and then additional overtime costs as and lost absorption as we made up for the last days of production.

All right. Thank you for the color.

Thank you. Our next question is from Martin Englert from Jefferies. Your line is now open.

Hi, good morning everyone.

Hi, Martin.

So, you noted no change in the outlook within the release which includes load of mid-single digit value-added sales growth as well as shipments, but then we saw a slightly lower volumes year-on-year I imagine some of this could be due to the disruption at Trentwood and then we should probably expect some lower volumes due to the planned Trentwood outage in 2Q. So reasonable to assume that you're expecting some catch up in the back half of the year to make up for that right?

I don't know if it's catch up, but we expect very strong demand in the second-half of the year. So, as long as Boeing sticks to this current plan where there have reduced production for just a few months here before returning to 52 and then a 57 build rate in the third quarter, we're expecting really strong demand, general engineering continues to be strong, we expect automotive is going to improve in the second-half we're suffering now in the early part of the year as Neal mentioned from some of the end of life programs hitting us, but we're ramping up some of the new programs and expect some of that to begin to hit in the second-half. So, we're expecting once we get past this Trentwood, major Trentwood outage here in the second quarter we're expecting strong demand and really strong results in the second-half of the year. And that's despite the fact that we had $5 million or so surprise in the first-half - our first quarter from the downtime and the repurchase didn't get here. So we're still - we're very optimistic here about the second-half the year. So long as this Boeing situation gets resolved and recertified relatively promptly.

Thanks for all the detail there, that's very helpful. And then when thinking about the guidance here and more so kind of heading into 2Q and the implications, so you provided the $15 million headwind. But how should we think about that so this quarter was $56 million or so adjusted EBITDA, add back you know $5 million or so to that. But should we take like a $60 million EBITDA and then be pulling out about $15 million or a rough run rate for 2Q, given the outage or will there be some positive partial offsets there?

That sounds like a question from an analyst who has really worked hard on his forecast. So I mean your - all your rationale makes sense here, we're not going to comment on our second quarter outlook, but basically we're saying we're looking - we're expecting roughly $15 million from a normal run rate kind of operation. You saw what we did in the second-half of last year, we had really, really, strong results in the second-half and even with the $5 million hiccup in the first quarter, we had really, really, strong first quarter. So it's pretty obvious that we've got really strong momentum here underlying in our business. And clearly the first quarter would have been a $60 million-plus pace and high 20s EBITDA margin. So, long as market conditions stay the same and we get through this outage in the second quarter, we're expecting really strong results going forward.

Okay. But nothing else to call as far as positive partial co-offsets that you'd expect in 2Q there, right?

No, no. I mean basically, it's - we lose sales and production here in the second quarter as we go through the outage. One could say with the Boeing situation, it turned out to be good timing which is just an accident for us. But now the second-half demand was there. It's really that strong going forward, at least under the current situation.

Okay, excellent. Thanks for all the added color there and good luck.

Thank you.

Thank you. [Operator Instructions] And our next question is from Curt Woodworth from Credit Suisse. Your line is now open.

Thanks. Good afternoon, Jack, Melinda.

Hi, Curt.

Hey, Curt.

So, first question just on the aerospace dynamic, can you talk to, I guess maybe pre the Boeing event when you had all of your OEM nominations sort of settle in the first quarter. How your airspace volume nominations looked this year relative to last year? And have you seen any change in spot lead times as a result of the Boeing build rate cut?

The nomination for this year is up from last year, which you would anticipate with the build rate increases that they've announced here. We've seen no change in order patterns given the situation. Boeing on their call this morning just reiterated that they're using this period of time to work on the health of the supply chain. As we view it and we see what's happening with orders here and we've still got despite the cutback to 42, we've got really, really strong pressure on our plants to deliver on the orders that we have on the books here. Our view is that the de-stocking situation that we endured for a year and a half all of 2017 in the first-half of 2018 it would appear to us that that went on for too long. And the supply chain wasn't ready to meet the 52 rate and certainly the 57 rate. And so that's why we still see strong demand in terms of order rate here given the plans to ramp back up to 52 and then 57 in the third quarter. They're working hard on the health of the supply chain. So we think that de-stocking was too pronounced. There clearly is restocking here with the supply chain producing at a rate above the 42 that Boeing is building planes at. But that appears to be getting everything back into equilibrium to meet that 57 demand. So long as they get recertified relatively promptly as they hope to do we think this should be pretty clear sailing going ahead if the ramp up happens as planned here. But we put the caution in here primarily because who knows when with all these government entities involved now who knows when we're going to get the recertification and what the implication maybe for the future because everything is full go to ramp back up to 52 and 57 here later in the year.

Okay, that's super helpful, and then just where your lead time stand now for your more spot exposed aerospace business?

Just as I've responded on your prior question we've really seen no change in our order outlook at this stage and as we commented on the prior call a couple of months ago. We basically are fully booked. We've allocated capacity for the remainder of the year to our strategic customers based on their requests and we still stand there. We're basically fully booked at Trentwood for the rest of the year and have very strong demand throughout the rest of our aerospace and general engineering operations.

Okay. That's helpful. And then I guess in terms of framing the max issue, can you help investors understand a little bit of exactly what the magnitude of the impact could be in the sense that, like how - like, what percent of aero demand would be just from that one plane? Just, because I think it's hard for investors to understand kind of the scope of really what it means.

It's not a huge number, the 52 to the 42 in terms of percent of total aerospace demand. I mean, you still have Airbus going at their rate. You have a lot of wide-bodies being produced. And as we mentioned in our comments, we're seeing some nice growth in the military applications as well. So, it's not a big hole there. But obviously, if they back-off, stay at 42 for a long time or have to back off from 42, that will start to have a bigger and bigger impact.

Okay, great. Appreciate it.

Thank you. Our next question is from Josh Sullivan from Seaport Global. Your line is now open.

Hey, good morning,

Hi, Josh.

I mean, it sounds like you're marrying essentially what Boeing has communicated here, which makes sense. But if we do see some de-stocking on the 737 front, what are the thoughts about transitioning demand back from the general engineering side. It sounds like you had given up some of that general engineering capacity for aerospace, but how would that work in the reverse direction, I mean do you think the market could support that?

Yes, I mean at this stage demand is strong. The question is how big is that bread box, but certainly there's flexibility to move back and forth between general engineering or really between non-contract business. Our first priority, we must fulfill our contractual commitments to our - based on our long term contracts. And that's why we ask for declarations a year ahead of time, so that we can then look around what our contractual commitments are to our major long term customers. So if there is a change in that outlook it will be a similar situation to what we did if you go back and look at 2017 and the first-half of 2018, you'll see really strong general engineering shipments and that was with strong general engineering demand and with a pretty significant de-stocking situation in the entire aerospace supply chain. So there's flexibility, can you turn it on a dime? No, but over a period of months, you know there's flexibility there. The bigger impact would be if it's a major reduction in total demand then - then it starts to shorten lead times and weaken overall demand and there could be longer term pricing implications, but we're a long way from anything like that.

Okay. Got it. And then just on the auto extrusion content transition here. Yes, I mean the automotive penetration of aluminum; it's going on a couple of years here. You know have there been any changes in the duration or the terms of the contracts with the OEMs, just that as that matures with some of these newer platforms?

No, it's basically business as usual there, and I mean there's no change for the last 30 years, every new contract there's tremendous pressure on pricing, but we've been dealing with that for decades, so it's pretty much business as usual.

Okay, thank you.

Thank you. Our next question is from Jeremy Kliewer from Deutsche Bank. Your line is now open.

Yes, a follow-up on, on the extrusions side. Where I guess are you seeing particular areas of strength or particular areas of weakness?

You're talking extrusions in general?

No, auto extrusions, so it…

Auto Extrusions?

Yes. Yes.

Well, it's the macro situation. You've got the shift in the OEMs shifting from two a less sedan production and even more larger vehicle production and that trend obviously continues GM and Chrysler have made those announcements as well as Ford that they're going to make that change in terms of the mix of vehicles that they're building. So, so that continues to go forward there's really no change from that long-term trend other than it accelerating.

Right, but you're not seeing any anything that's caught you by surprise. I mean you warned of the first-half weakness on the model kind of ramped down before the new models ramp up but there's nothing that's out of whack there?

Yes, there's no surprise because as we said on the last call we have no idea how it's going to pan out this year. So we can't be surprised. So it just happened, yes, some of the into life came a little bit faster than we anticipated, but again it's just a normal transition here, you just, you don't know when they're how they're finally going to ramp down a vehicle because they don't know exactly how it's going to sell when they're taking out of service and then the flip side when they have a new model they're introducing. It's a question of whether the dog is going to eat the dog food here so. So they have their forecast in terms of how many they're going to sell. But then reality hits when we, they go out there and start to sell them.

All right. Thank you and good luck.

Thank you. Our next question is from Piyush Sood from Morgan Stanley. Your line is now open.

Hey, guys. Good morning. The question is around capital allocation as you work through this here assuming the economy holds up Boeing's orders normalize your costs will likely fall further into next year. Your automotive shipments will pick-up, so next year appears to be shaping pretty well. So just wondering how you're thinking about capital allocation going forward. Not really for this year but a little beyond would you be looking to increase investor returns or would you be setting it up for some kind of growth?

Our capital allocation priorities have been consistent for more than a decade here. So as we've said on prior calls we expect to be making organic investments in this $80 million plus territory for the next few years here. We continue to look for good attractive inorganic growth opportunities with the same thing, we'll only do them if we can do a business that we understand and create long-term shareholder value. And then we go to our regular dividends and last is share repurchases. So there's nothing really on the horizon at this stage that would change or shift the priorities among those four areas.

Okay, thank you. And one more looking at the historical valve [ph] per pound for aerospace looks like the 1.86 level in 1Q brings it back to those historical levels. So I just want to understand that if there is probably some more upside to it once the Boeing situation resolves itself or do you think this is the level where you wanted it to be and it's finally climbing back up to that point?

The value-added revenue per pound there's such a significant component of the aerospace that is contract business and then the products within that everyone focuses on plate but we've got a wide variety of products in there that have value-added revenue per pound ranging from a couple of dollars up to $8 or $9 a pound. So, there's a big mix component in there. There's also a component of what's happening with the non-contract business where pricing actually has improved. But in terms of predicting what the value-added revenue per pound is, it's really there, there's too many variables in there, I mean we have our forecast, but it just depends on how the order base unfolds.

All right. Thanks so much and all the best.

Thank you. At this time I'm showing no further questions. I would like to 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 an update on the second quarter coming up here in July. Thank you.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect.