Melinda Ellsworth - VP, IR and Corporate Communications Jack Hockema - CEO and Chairman Dan Rinkenberger - EVP and CFO

Edward Marshall - Sidoti & Company PT Luther - Bank of America Merrill Lynch Novid Rassouli - Cowen & Company Jorge Beristain - Deutsche Bank Curt Woodworth - Credit Suisse Josh Sullivan - Seaport Global

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum's third quarter 2017 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, 2016. 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 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.

Our third quarter results were consistent with the market dynamics and trends in the first half of the year. As expected, we experienced normal seasonal demand weakness and increased major maintenance expense.

Several trends from the first half continued in the third quarter, including year-over-year growth in automotive extrusion shipments, solid demand for our general engineering applications, aerospace supply chain destocking, a leaner product mix with lower sales margins, and year-over-year benefit from favorable scrap raw material costs. We also continue to benefit from year-over-year improvement and underlying manufacturing cost efficiency across the platform.

However, synchronization of the new equipment and automation installed at our Trentwood facility during the second quarter proved more difficult than anticipated and as a result, Trentwood experienced lower than expected throughput in the third quarter. We continue to make steady progress in the ramp up and expect to be fully operational before the end of the fourth quarter.

I'll now turn the call over to Dan for additional color on the third quarter and then we'll provide an update on our outlook. Dan?

Thanks Jack. As expected, normal seasonal demand weakness occurred in the third quarter with shipments lower for virtually all of our products and total value-added revenue down 8% from the quarterly pace of the first half.

On a year-over-year basis, while total shipments increased slightly in both the third quarter and the first nine months of 2017, value-added revenue declined 5% in the third quarter and 3% in the first nine months compared to the prior year. This reflected a leaner sales mix with lower aerospace shipments, strong general engineering volume, and growing automotive bumper shipments.

Additionally, compressed sales margins that we highlighted earlier in the year continued into the third quarter. Third quarter value-added revenue declined $9 million from the prior year, primarily due to aerospace and high strength.

Our aerospace shipments were 4% lower than the prior year third quarter, reflecting slower than anticipated ramp up of the newly installed equipment and automated controls at Trentwood as well as ongoing supply chain destocking. Lower sales margins on non-contract sales also persisted into the third quarter, contributing to a $10 million decline at aerospace value-added revenue compared to the prior year.

Partially offsetting the aerospace supply, automotive value-added revenue increased $1 million compared to the prior year quarter. Growth in bumper program volumes, which more than doubled during -- compared to the prior year, was partially offset by lower shipments of our other automotive products.

For the first nine months of 2017, total value-added revenue declined $19 million, reflecting lower aerospace, partially offset by improved automotive and general engineering value-added revenue. Aerospace value-added revenue declined $27 million on 4% lower shipments compared to the first nine months of 2016 due to continued supply chain destocking and temporarily constrained plate capacity during the second quarter installation and third quarter startup of new equipment and automated controls at our Trentwood facility.

Additionally competitive pricing on aerospace spot transactions prevented the full pass through of higher contained metal costs. Automotive value-added revenue increased $3 million or 4% compared to the first nine months of last year, driven by significantly higher shipment volume of bumper programs.

And general engineering value-added revenue improved $5 million or 3% compared to the prior year on improved shipments for virtually all of our general engineering products. However, competitive pricing hindered our ability to pass through higher contained metal costs on some of our higher value-added general engineering products.

Turning to the next page, EBITDA for the third quarter of 2017 was $43 million compared to $45 million in the prior year. The $2 million year-over-year decline reflected an adverse impact of $10 million due to a leaner product mix and lower sales margins, which was partially offset by a $3 million benefit from favorable price spreads on scrap purchases and $5 million of favorable manufacturing overhead and other costs.

Third quarter EBITDA margin of 23.1% was a slight improvement from 22.8% in the prior year, but a reduction from the record level of 26.7% achieved in the second quarter of this year. For the first nine months of 2017, EBITDA was $151 million, a $3 million reduction from the prior year.

A $24 million adverse sales impact was largely offset by a $9 million benefit from favorable price spreads for scrap purchases and $11 million of favorable manufacturing overhead incentive and other costs. The EBITDA margin for the first nine months of 2017 was 25.5%, up slightly from 25.3% in the prior year.

Turning to slide eight, operating income as reported for the third quarter of 2017 of $40 million included $7 million of non-cash, non-run rate gains. Adjusting for these non-run rate gains, operating income for the third quarter was $33 million compared to $36 million in the prior year quarter and the third -- and the $3 million decline reflected the $2 million reduction in EBITDA that I just covered as well as a $1 million increase in depreciation expense.

For the first nine months of 2017, reported operating income was $111 million. Adjusting for $11 million in non-cash, non-run rate losses, however, operating income for the first nine months was $122 million or a $6 million reduction from the prior year period, reflecting a $3 million reduction in EBITDA and a $3 million increase in depreciation expense.

Reported net income for the third quarter of 2017 was $20 million or $1.16 per diluted share. Adjusting for non-run rate items however, net income was $16 million for the third quarter or $0.90 per diluted share.

The third quarter included a $0.15 per share adverse impact from recording a $2.5 million deferred tax liability for taxes due upon repatriation of the existing earnings of our Canadian subsidiary. Recording this liability increased our effective tax rate for the quarter from 38% to 45%.

For the first nine months of 2017, reported net income was $61 million or $3.49 per diluted share. Adjusting for non-run rate items however, net income for the first nine months was $68 million or $3.89 per diluted share.

The effective tax rate for the first nine months was 38% as favorable tax items in the first half of the year offset the $2.5 million deferred tax liability recorded in the third quarter. Of course our cash taxes continue to be low as we apply our pretax earnings against our net operating loss carryforwards.

Capital spending was $16 million in the third quarter and $56 million in the first nine months of 2017. We expect full year capital spending will be approximately $80 million.

During the first nine months of the year, we returned $93 million of cash to shareholders through share repurchases and quarterly dividends. And at September 30th, cash and short-term investments totaled approximately $265 million and borrowing availability on our revolving credit facility was $287 million.

And I'll turn the call back to Jack to discuss market trends and outlook. Jack?

Thanks Dan. Turning to slide nine and our aerospace applications, as we have previously noted, we anticipate headwinds from commercial aerospace supply chain destocking and lower sales margins will continue through the remainder of the year.

While we had previously anticipated that our aerospace shipments this year will be comparable to 2016 due to the slower than anticipated ramp up of the new equipment and automation at Trentwood, we now expect our 2017 aerospace shipments will be less than 2016. Looking ahead, despite isolated instances of the supply chain inventory overhang lingering into 2018, we continue to anticipate solid aerospace demand growth in both 2018 and 2019.

As demand strengthens, we expect increasing costs and throughput benefits facilitated by the new equipment and automation at Trentwood. For our automotive extrusion applications, shipments for our new bumper programs are ramping up as expected and our outlook for 2017 automotive shipments and value-added revenue are unchanged.

We continue to expect double-digit year-over-year growth in shipments and mid-single-digits value-added revenue growth as demand growth is concentrated in lower value-added parts. Turning to slide 10, over the past three years, our general engineering shipments and value-added revenue have grown at a 6% compound annual growth rate and underlying demand remains strong in the fourth quarter.

We're hopeful this positive trend will continue into 2018. Summarizing our comments today, as expected third quarter results reflected normal seasonality, higher major maintenance expenses, and a continuation of many of the trends from the first half.

However, synchronization of the automation and new equipment at Trentwood was more difficult than anticipated. We expect to complete the ramp-up during the fourth quarter to be fully operational at Trentwood by the end of the year.

In the fourth quarter, we also expect plant major maintenance expense similar to the third quarter, plus normal seasonal demand weakness. Looking ahead to 2018 and 2019, we expect strong demand growth to continue for automotive applications and despite modest destocking lingering into 2018, strong demand growth for our aerospace applications.

In addition, we are encouraged by the 6% compound annual growth rate in our general engineering shipments over the past three years and are optimistic that strong demand will continue. We'll provide more color on our 2018 outlook on the fourth quarter call in February.

We'll now open the call for questions.

Hi everyone. How are you?

Hey Ed. Good.

So, maybe we can -- can you define the throughput inefficiencies in the quarter? May be quantify is probably a better word?

And then are there any additional capital necessary to fix any of that?

Yes. I'll answer your second question first.

No, there's no additional capital. In terms of quantifying it, we estimate the Trentwood impact itself was $2 million to $3 million of EBITDA, however, that was partially offset by performance in our other operations, better than anticipated and continuation of the strong raw material margins that we had not anticipated from the first half.

So, really the numbers -- the final EBITDA results weren't that far off of what we expect a little bit because Trentwood was partially offset by some other factors.

Got it. And in the second quarter, I remember there was $4 million of other plant maintenance that was going to be pushed into the second half.

How much of that hit in this quarter related to kind of some of the inefficiencies you've had? Did you -- is the bulk of that coming in Q4?

How do I think about that?

It's spread relatively equally. The third quarter was about $2 million of higher major maintenance than the first half run rate.

And as I just said in my remarks, we're expecting fourth quarter to be similar or maybe a little bit more, but basically in the same ballpark, a couple of million -- $2 million to $3 million higher than what we experienced in the first half run rate.

Okay. And then just one final one if I may.

Longer term, I wanted to ask when you look at the next-generation aircraft and I guess I'm talking about the large one, this 777X, timing could be whatever, but when I start thinking about the shipment rate of December of 2019, when do you start seeing the supply chain restock for that?

Not sure that we'll see the dramatic supply chain restocking just related to the 777X. As we've said, we think we're going to see modest destocking throughout the supply chain lingering into 2018.

We think we'll be back to equilibrium in 2019. Does that mean we'll start to see some restocking?

I wouldn't go that far, because there are just so many dynamics beyond the 777X. That's just one component of the whole supply chain.

Got it. Thanks very much guys.

Appreciate it. Thanks.

Sure Ed.

Thanks. Hi Jack and Dan.

How are you guys?

Hey PT. Good.

Good. I wanted to talk a little bit more about the aerospace plate destocking you mentioned.

Is there any change in the outlook that you have than what you provided in last earnings call in terms of lingering into 2018? Or is it largely the same as you had seen?

We have exactly the same view. The only thing that's changed is because of some of the inefficiencies we've had with the ramp-up here, our shipments are reduced, but it's not because the orders weren't there.

It's because we didn't get the throughput we anticipated.

Got it. So, the -- like lead-times for plate, are they pretty similar to what you said?

Last quarter, I think it was--

No, they're actually down a little bit. We're nine to 10 weeks down.

I think we were 10 to 14 weeks when we talked about this in July. And our lead-times are pretty consistent we believe with competition at this point.

Got it. Thanks.

That's helpful. And then can I just jump over real quick to general engineering.

I know in the past you had talk about import pressure, right, kind of weighing on that segment. But you had really good volume growth performance as you mentioned on the 6% CAGR.

Is there any change in the environment from imports? Or are you competing more on price and focusing on cost reduction to protect margins?

Just curious for more color there.

Yes. No real change.

The import price competitive intensity remains. And we've seen price degradation on our products were back.

We've seen some improvement in 2015 and 2016. We're back down basically to where we were in 2014 in terms of pricing.

But demand has been strong and we've maintained our position there in general engineering. So, we've had a nice growth in our shipments and our value-added revenue.

If you go back to 2014, both of them growing at a 6% CAGR over the last three years. But you're right; you commented what's our focus.

Strategically, we're not counting on price improvement on these products. We always hope for it.

We always push for it. But we're not counting on that.

Our real focus is to drive down our conversion cost. And we're doing that through all of our lean manufacturing and Six Sigma efforts, but also the investments at Trentwood in particular and specifically the work we've done on the light gauge plate or the work that we're in the process of doing with the furnace and then we'll have some additional automation and handling improvements next year that will really give us a step change in our cost on light gauge plate, which is a significant portion of that general engineering plate market.

Great. Thanks so much Jack.

It's helpful. I'll get back in queue.

Okay. Thanks PT.

Hey Jack, Dan and Melinda. Thanks for taking my questions.

Just sticking with the destock kind of bleeding and lingering into 2018, I just wanted to get a sense is that what you guys are thinking based on kind of what you're seeing? Or is that what customers are telling you?

I'm just trying to get the level of conviction with maybe not having this bleed any further past the beginning of 2018?

Yes, that's primarily based on customer feedback. We're pretty confident of what we're going to see next year unless something happens in the rest of the supply chain.

But most of this has been related to the big OEMs this year and we think we've got pretty clear visibility what it looks like for next year.

Okay. And so as far as kind of arrow shipments, I know it's tough to -- I guess maybe call exactly, but I'm just trying to get a sense of when we might expect to see that year-over-year growth to return to aerospace shipments?

We should see it throughout the year, next year. It pretty much goes in annual lumps rather than migrating through the year, the way the big aerospace supply chain works.

So, you would expect 1Q aero shipments to be up year-over-year?

I expect first quarter demand to be up, industry demand to be up, we'll give more insight into what our outlook is in February.

Got it. And then the last question, just on margins, I know you guys have been indicating kind of low 20s earlier in the year, just wondering if 3Q is kind of the trough level?

Or if you think there's -- it sounded like there might be a little more maintenance in 4Q. So, just trying to get a sense of when we should take about margins troughing?

Well typically, we have stronger margins in the first half than the second half. And that's related to two components.

One component is we typically have higher major maintenance expense in the second half as we do this year. But the other thing is because of seasonal demand, which is much stronger in the first half than the second half; we have much less operating leverage in the second half.

So, we have higher expenses with the major maintenance and we have less operating leverage because our value-added revenue is down in the second half. So, we expect weaker margin here in the second half of the year and we expect our margins should pop-up in the first half next year.

Got it. Thanks for taking the questions.

Hey guys. One just very macro question.

I'm not sure if you had any client inquiries or you could see any possible positive effect from the Kobe Steel issues, not sure if you compete with them in aluminum in any way. But just wondering if -- obviously, this is bad for the industry, but could this also lead to either more markings for you guys or maybe a negative could be higher certification or third-party certification charges becoming more of an industry norm?

Just any comments on that.

No, there's no impact on us, Jorge. They are not in aerospace and they are not in North America general engineering and maybe general engineering in Asia, but they aren't here.

So, there's no direct correlation there. But beyond that, we pride ourselves on the quality and the integrity of our systems and our products.

So, none of our customers have any coms [ph] about Kaiser ever being involved in a situation like we've seen with them.

Okay. And then the other question was just maybe more for Dan.

We've seen the surge in global aluminum prices lately and alloys, obviously, you guys are mostly hedged or 99%, but could you just talk about would there be any -- sort of how many more months delay until we start to see some of that impact trickle through for the non-hedged portions of the higher metal costs starting to affect your cost of goods sold?

Well, we actually do have some -- if you've seen our statements, we've got some hedges on some of our alloys now too, which should protect about probably two-thirds of that for the next couple of years. And then for the higher metal prices itself, most of that is going to be passed through because of our contract structure pricing or we will pass it through on some of our spot.

During the course of this year though, we continue to have an inability to pass through some of the higher increases and higher metal prices that we've seen, just because the competitive pricing. The competitive pricing is because of foreign competition for GE, but also in the aerospace because of the destocking and so those spot transactions will be affected by competitive pricing.

So, if we see some let up on the destocking dynamic, I think that will help us get some price back on the spot aerospace business.

Got it. But you would not specifically foresee having to call out any kind of alloy or higher metal charge that was not covered by hedging in the next quarter or two?

The other thing I can say is on occasion if there's a significant run up, quick run up metal price, we can have a lag in our ability to pass that through general engineering. And we have called that out in the past.

But in that -- barring that, I don't see something that's unusual circumstance that we wouldn't have to call out in that way.

Okay. Thanks Dan.

Yes, hey. Good afternoon Jack, everyone.

Hey Curt.

So, kind of a similar question to Jorge. I mean it seems like there is more pressure on contained metal.

But then you're also seeing a pretty big offset on scrap spreads widening, and that be a tailwind. So, thinking about how this progresses into 2018, is your sense that the scrap spreads kind of stay wide and that would offset the contained metal costs?

Or how do you see it playing out?

We think that we'll -- that part of the improvement in raw material cost is our own initiatives that we've taken in-house to improve our utilization -- increase our utilization of scrap. But part of it is because of the wider spreads on scrap compared to prime.

We think the spreads eventually are going to decline. We thought they would have gone back to normal by now, they haven't.

We've maintained those spreads. But we don't think the two will be associated.

The spreads will operate independent of what happens to market prices. When we look at it longer term, similar to an answer I gave earlier, we're hopeful for improved pricing.

But as far as we're concerned strategically, we're planning that they stay where they are and we're addressing that by increasing our volume as we go forward, giving us more operating leverage, and by driving down our conversion cost. That's really our focus and the markets will go where the markets go.

We don't think it's going to get much worse than what it is now, maybe it will get better, but we're not counting on it getting better.

Okay. And then just with respect to mix and price dynamics, it seems like if you X out the volume delta from your value-added revenue, the pricing mix impact on aero high strength was down 6%.

Can you comment on how much of that -- what was mix versus weakness you're seeing in the spot price environment?

I'd say virtually all of it is the spot price and that's a combination of not being able to recapture the higher metal cost -- completely recapture those higher metal costs. That's basically it.

Quarter-to-quarter, we'll see changes in the mix, customer mix that we're shipping. But over the course -- over the longer term, over the course of the year, that's pretty much constant year-to-year.

It fluctuates quarter-to-quarter.

Okay, mainly spot. Okay.

And then just last one for me. On consolidation potential, there's been a lot of discussion around what's going to happen with Aleris, Constellium, it seems like you would be a potentially logical acquirer of some of the assets of Aleris, given you used to own the [Indiscernible] mill.

Can you comment on how you'd like to see Kaiser participate in potential consolidation? Would you like to be an acquirer?

And can you comment on what type of leverage you would feel comfortable going to if an opportunity that makes sense presented itself?

Sure. Our strategy with the Board remains very consistent.

And we've just reviewed it again with them in September, we review every quarter. But we have this strategic retreat, where we really dive into it in September each year.

And we again conclude that we're very confident that the business model that we have today will deliver strong shareholder returns over the long-term, which is our objective, which then puts us in the position of being opportunistic as it comes to acquisitions. We believe that we are a preferred buyer in many cases, but it gets back to we will not pay outrageous prices for these assets.

We're going -- first it has to fit us strategically, but then secondly we have to be able to buy it at a level that creates long-term shareholder value. And if we can't accomplish both of those, then we'll stay path.

However, we'd like to expand, we'd like to do it through acquisition beyond our organic growth, but we're going to be very disciplined in how we approach these things.

Okay. Thank you very much.

Good afternoon.

Hey Josh.

Hey. Just on the aerospace side, with Boeing taking up the rate here on the 787, for an idea for modeling, how soon do you guys see the demand ahead of the announced build rate taking a production?

Well, we give annual declarations from the big OEMs. So, by this time of the year, we've got a pretty clear picture on what their buy will be within a range for next year.

Looking at the year after next, we have some indications from them, but we do our own modeling as well. So, we have detailed models, where we take the anticipated builds and what we believe the content is and build up the total industry demand outlook, which is where our projections come from.

So, that's all built into a model. But in terms of the reality of it, because we can guess it what destocking and restocking is going to be, but it's just a guess.

So, it really gets down to the annual discussion with the big OEMs in terms of exactly what they intend to buy the next year.

Okay. Thanks.

And just on Trentwood, how confident are you guys in the remaining steps to get the new equipment ramped up by the end of the year? Is that a conservative look or is there any chance you'd slip into Q1?

No, we're -- I mean, you never say never, but we're pretty optimistic. We're frankly -- we're a little surprised that it has taken us this long.

In retrospect, shouldn't have been surprised. The work that we've done on the shear, their significant automation of the handlings, so that we get good efficient utilization of the mill by getting -- once we've sheared the plat, we get it off that hot line quickly and efficiently.

And it's handling similar to what we used at our big stretcher and the finishing end of the mill. But now we remember 10 years ago that that wasn't like falling off a log.

There's a lot of complexity in that automation, getting the ballet [ph] as we call it, to work. And then in the heat treat into the plant, we've developed a science.

10 years ago, we really struggled when we started into the new furnaces with heat treat plate. But now that's become a process and we've continued to put extensions of capacity and we know exactly what to do and it's become routine for us to do it.

In this case, we're back to where we were 10 years ago. We've completely rebuilt a furnace.

We're changing the capabilities of that furnace run much broader array of products that's run in the past. And what we've discovered with all the automation and all the controls and the sophistication that we have to create the exceptional consistent quality that we delivered to our customers.

We've gone through a longer process of shaking down that furnace and shaking down that the process than what we anticipated. But we're well through that process now.

We're getting close to the end line. So, we're very confident that we'll be up and going full speed by the end of the year.

Okay, great. And then just one last one.

I mean I guess where are you on that -- what was it five-year investment in Trentwood, I think it was $150 million? How far through that $150 million are you now?

We expensed slightly over half of -- I think probably over the year, it has been around 60% of it. But we do have parts of this project that will continue on for a couple years now.

So, the big things that we expect to get benefits for we focused on first and that's what we've been focusing on in 2017.

Okay, great. Thank you.

Okay. Thanks everyone for joining us on the call.

We'll look forward to updating you on the fourth quarter and the full year on our conference call in February. Thank you.