Good day, everyone, and welcome to the Kaiser Aluminum Third Quarter 2015 Earnings Call. Today's conference is being recorded. At this time, I would like to turn the call over to Melinda Ellsworth, Vice President of Investor Relations and Corporate Communications. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's third quarter 2015 earnings conference call. If you have not yet 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 Chairman, President & Chief Executive Officer, Jack Hockema; Executive Vice President & Chief Financial Officer, Dan Rinkenberger; and Vice President & 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, 2014. 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've 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. And welcome to everyone joining us on the call today. Our third quarter results continued the trend for strong year-over-year improvement and we're in line with our outlook for the second half. As we had anticipated, strong underlying product demand and expanding sales margins in the third quarter were partially offset by the impact from plant maintenance at our Trentwood facility on costs, throughput and manufacturing efficiency. In addition, we experienced some unanticipated growth-related inefficiencies in our automotive operations. Aerospace demand remained strong in the third quarter and automotive demand was fueled by new content and build rates for large vehicles while general engineering and industrial demand exhibited normal seasonal weakness. Sales margins improved on the back of spot price increases for certain specialty long products and heat treat plate products, as well as benefits from lower contained metal prices on some high value-added products. During the July earnings call, we discussed preventive maintenance activities for the second half including a planned 10-day outage in the third quarter on key equipment at Trentwood. The scope of the third quarter work at Trentwood involved extensive mechanical and electrical maintenance on the hot line, replacing major structural components on the large plate stretcher, rebuilding two furnaces in the remelt operation, and hot line modifications to facilitate a future Phase 6 capacity expansion of heat treat plate capacity. As anticipated, an anticipated consequence of the plant equipment outage was reduced throughput, and Trentwood's production was down 6% in the third quarter compared to the first half run rate. During July earnings call, we also indicated that the estimated impact from planned maintenance expense and related inefficiency in the second half would be as much as $10 million compared to the first half of 2015. In the third quarter, we incurred approximately…

Thanks, Jack. On slide 6, we discussed the third quarter earnings relative to the prior-year period. Additionally, since our outlook comments in our last quarterly earnings call were made in the context of the pace of the first half of the year, we also compared third quarter to the quarterly average of the first half. As Jack mentioned earlier, value-added revenue in the third quarter reflected expanded sales margin due to higher spot prices on certain specialty [indiscernible] products and heat treat plate products as well as lower contained metal costs on some higher value-added products. These pricing dynamics, as well as favorable product mix, drove a $14 million increase in value-added revenue for aerospace and general engineering products on relatively flat volume compared to the prior-year quarter. Value-added revenue for our automotive extrusions increased 26% or $6 million in the third quarter compared to the prior year, primarily reflecting higher volume as we launched – as we continue to launch and ramp up numerous new automotive programs. Overall, total value-added revenue in the third quarter increased 11% over the prior-year period on 4% increase in total shipments. Compared to the first half quarterly average pace, value-added revenue for aerospace was relatively flat as lower volume due to the planned outage at Trentwood was largely offset by favorable price and product mix. Automotive value-added revenue improves 4% compared to the quarterly average pace in the first half of the year, on moderate volume increases from recently large programs as well as favorable mix of large vehicle production. Value-added revenue for general engineering applications declined to 2% due to seasonal demand weakness offset, in part, by favorable pricing mix. In total, value-added revenue in the third quarter was comparable to the quarterly average pace of the first half of 2015. Shifting…

Thanks, Dan. Turning to slide 9 and our outlook for aerospace and high strength applications, underlying demand continues to be strong. As I noted earlier we are on track in the fourth quarter for strong throughput and improve manufacturing cost efficiency of Trentwood and we expect strong sales for our aerospace and high strength applications especially sheet and plate products. We continue to anticipate record 2015 value-added revenue for these applications at the low end of our outlook for 6% to 8% year-over-year growth. The primary drivers for the 2015 growth in these applications are higher build rates for commercial airframes and reduced drag associated with the prior supply chain inventory overhang. In addition, we have benefited from an improved pricing environment for spot market sales of heat treat plate. Regarding automotive extrusions, we maintain our outlook for approximately 20% year-over-year value-added revenue growth. We anticipate that fourth quarter demand will be off slightly compared to the third quarter due to normal end-of-year seasonal demand weakness although demand within the supply chain for large vehicle components continues to be volatile and unpredictable. Longer term, we continue on a strong growth trajectory for automotive extrusions with a healthy pipeline in new programs, a favorable mix of vehicles, and steadily growing vehicle builds. Turning to slide 10. In our outlook for general engineering applications, we anticipate normal seasonal demand weakness in the fourth quarter although we expect that general engineering plate shipments will increase compared to the third quarter, which had output constrained by the 10-day outage at Trentwood. We continue to expect 2% to 3% year-over-year shipments growth for these applications in 2015. While we expect pricing in the fourth quarter similar to the third quarter for these applications, we continue to anticipate increased import activity next year for general engineering…

[Operator Instructions] And we'll take our first question from Edward Marshall with Sidoti & Co.

Hey, guys. How are you?

Hi, Ed. Good.

Hi, Ed.

So, I'm going to ask about the automotive disruptions. Is there any way that you can quantify the drag in the quarter, either from a percentage terms or maybe on absolute dollar value?

Yeah. It was similar to the first quarter. If you recall, on the call about the first quarter, we indicated that was order magnitude around $2.5 million year-over-year compared to the average run rate last year. Then, in the second quarter, in response to a question from someone, I indicated that the second quarter was pretty much back on track with 2014's overall performance. And then, on the third quarter, we're back to around 2.5 order magnitude blip compared to last year's performance.

Got it. I mean, you sound a bit gun shy, but do you think you got it under control or is it just the erratic and sporadic kind of patterns that are out there? Or is it just too early to call?

I think it's going to be better. I think that the results we saw in the second quarter turns out we're premature. But I don't think we'll be back to a 2014 pace in the fourth quarter. As I mentioned a couple of times in the remarks here, we continue to see very volatile demand. It was multiple supply chains in the third quarter. It's pretty much restricted to one part of the supply chain right now but still is very disruptive on our operations. I mean, we get weeks where we've got demand 40% to 60% above the theoretical maximum that we're – that we've been – that we're prepared to produce and we'll run at that rate for a couple of weeks. And then all of a sudden it's down 40%. So, it's obvious that some folks beyond us and the supply chain are going through the same kind of a learning curve here. So, we have our own learning curve issues and that's the primary issue and we think that that will be better in the fourth quarter. It's just difficult to predict how much disruption is going to continue from this volatile order patterns.

Got it. Okay. And then if I look – if I kind of switch gears to maybe value-added pricing and I look at kind of the cycle. And I just kind of want to see if I can get a gauge. Is the pricing that you're receiving kind of on the automotive products right now, is that reflective of kind of the intricacy of the products that you're producing or is it more about shortage of material and the call in the material? And therefore, there's going to be some cyclical pattern and eventually kind of rest back down to where we've seen it historically.

Well, automotive is what you see if you're looking at value-added revenue per pound for the group of automotive products that we supply, virtually, all of the change in that price is product mix-related. We have – as we say in a lot of these applications, we have a wide range of prices from some of our long products value-added revenue in the $0.50 to $0.75 a pound range. And you get up to some complex products like drive shaft tubing is up in the $3, $4, $5 per pound value added. And the real growth, the drive shaft is a mature product. The anti-lock brake systems is a mature product or the blocks for the brake systems. But the big growth is in chassis and structures and in bumpers, and those are relatively low value-added. So, as we grow there, you'll see the average value-added revenue coming down, which is not reflective of pricing. It's strictly reflecting mix.

Got it. And then on value-added pricing on aero in the quarter, I mean, it looked like it was very, very strong. I presume it was mix as well.

Yeah. Well, some of that is mix, but some of that is price. There's a little bit of benefit in all of the aerospace and high strength – or the spot sales of aerospace and high strength coming from the lower contained metal costs. And there are some actual price increases, relatively modest, but some price increases on spot aerospace plate as well. So...

Was that a surprise to you? I mean, I remember...

No, no, no.

...your guidance was pretty – was up just slightly from the previous quarter.

Yeah. What we've been saying – we've been saying modest price increases on heat treat plate as the year went forward. We said we had some in the second quarter which we probably quantified. I don't remember. And we said we expected some more in the third quarter, so we did get some more in the third quarter. But a lot of what you're seeing there is mix as well.

Okay. And then I guess finally your comments in general engineering, as I kind of think about increased competition next year, I know when aero plate gets kind of chunky, it affects the pricing on general engineering. When it gets tight, it affects general engineering price. Does it reflect – does it happen in the opposite ways as well? If it's soft in general engineering, it would fall into aero plate as well, or is it different in that business line?

There's some...

[indiscernible].

Yeah. There's some correlation. It's more dramatic in general engineering than it is in aerospace. But there is correlation. They generally go up together, they generally go down together. It's just amplified in general engineering compared to aerospace plate.

I'm assuming that has to do with the approval processes and so forth...

No, it's...

...of the equipment and so forth?

It's the number of people that can play in each sandbox.

Got it. Thanks very much.

And we'll move to our next question from Jorge Beristain from Deutsche Bank.

Hi, guys. It's Jorge Beristain with DB. I guess my question is just on your guidance on the double-digit value-added revenue growth you're seeing in the auto segment. Is that more likely to be driven by volume, or is there a little bit of price still in there? Because you did comment in your guidance that pricing is kind of, if I read this right, stable at this point. But just trying to get an idea of how much of that growth going forward is volume versus price.

It's all volume. And again, any change you see in price will be mix-related rather than actual-price-related.

Great. Could you also give us a similar color for the aero as well?

In terms of the outlook going forward?

Yeah. In terms of how much is volume versus price.

Well, going forward, I wouldn't – it's premature, really, to look that far into next year. But frankly, I don't think we see much price change at all going into next year. So most of you what you see there will be mix. And I'll apply one more caveat out there. We are getting some expansion of margin in all high value-added products and the spot prices on high value-added, most of which are in the aerospace and high strength category. And so, if we start to see increasing aluminum prices per month, Midwest prices, we could start to get squeezed and that's always a function of how much it goes up and how fast it goes up because there's a lag in how the market adjusts to those changes in underlying metal costs. So, there is some risk there as we look into next year if we get a wrap at run-off in contained metal costs.

Thanks. And last question is just what are you seeing in the import market and how is there a kind of knock-on effect, particularly heat treat plate? My concern is that China seems to just be off the rails in terms of their year-on-year increases in aluminum output, obviously then concentrated at the low end. But are we starting to see them move up the value curve and are we now seeing heat treat plate or stuff that might be used in high-end aerospace applications also under pressure from imports?

No to aerospace. There's some impact on general engineering although we put it more in the category of imports rather than China. Their imports from Western Europe and imports from South Africa that frankly are a bigger concern to us over the next year or two than anything coming from China.

Got it. Thanks very much.

And we'll take our next question Steve Levenson with Stifel.

Thanks. Hi, everybody.

Hi, Steve.

Hi, Steve.

I have a question in relation to your lead times. Can you give us an idea how the 33 weeks compares to how things have typically been? And can you tell us that that helped you with planning that might eliminate some of the inefficiencies that you have recently.

First, the lead times are longer than what we've seen in the last three or four years, but we went through a four- or five-year period back from 2004, 2005 through 2008, where the lead times were almost infinity. The entire global market was sold out. In terms of whether it gives us visibility that helps us, the short answer to that is no, because a lot of these lead times are just booking a placeholder for key customers. And they still have plenty of time to decide the specification that they're going to order. So, there's a little benefit to having the longer lead times but not a significant benefit. And at Trentwood, the inefficiency that we had at Trentwood, that was 100% related to the plant outage we anticipated that when we had major equipment down for a portion or all of a 10-day period, that was going to be very disruptive in the operations, and it was. But we expect it is going to be right back on track.

Got it. Thanks. Second question, over the last few days, Boeing and Airbus have both been talking about upward pressure on single-aisle build rates. And if they do move – I know Boeing is already committed to 52 going into 2018 and Airbus has talked about 50, I don't know how much higher they would go. But if they go higher, would that require a Phase VI or even something beyond Phase VI, or do you have enough capacity now?

That specifically by itself certainly factors into the equation, but that won't tilt the balance one way or another. We're just – we're looking at the overall situation here in terms of overall demand for the industry where the other players are, but more specifically, what we see as the demand from our customers on our facility to determine when we pull the trigger on this.

Okay. Got it. Thanks. Last one, does Alcoa's decision to separate their businesses, do you see that helping or hurting anything?

No. I mean, we did that 10 years ago. So...

But a little late.

Pardon me?

They're a little late, I guess.

Well, it was – we had circumstances that made a little easier for us to do it. But others have done it and I've been asked many times in the past whether I thought the two should be together or separate, and my answer is, they're two completely different businesses. And that's basically what Alcoa has concluded as did Alcan when they split their businesses back 15 years ago as well.

Okay. Thank you very much.

And we'll move to our next question from Timna Tanners with Bank of America, Merrill Lynch.

Hey. Good morning, guys.

Hi, Timna.

Timna.

So wanted to just ask you if you have timing plans for the sixth Trentwood expansion that you were just preparing for with the outage?

No specific timing. We continue – as we've said on the past few calls, we've got everything in place to where we can pull the trigger. So if and when we make that decision, we'll be full speed ahead.

Okay. And then just wanted to clarify some comments you made. You said that you could be hurt by a rise, a rapid rise in prices. Are you benefiting from any of the precipitous decline in the LME or the Midwest premium?

Yes.

Okay. Didn't sound like you want to quantify that, but I guess I'll ask anyway.

I would guess, if you look at what our pricing was in the third quarter, and this is just a wag, if you will, maybe a slag, it's maybe $1 million to $2 million in the third quarter versus what we could see if we get a pretty rapid run up here over the next several months. But again, it's very difficult to predict. Hopefully, when it starts to go up, it will go up gradually and we'll be able to adjust to it and it won't have a big impact.

Okay. Makes sense. Last question I want to ask is, hypothetically speaking, if some of the domestic smelters shut in response to the low prices, would that have any impact on you whatsoever in terms of procuring raw materials?

No. We have global supply now, and we look at this strategically. So we're very careful in our strategic planning in terms of what our supply base is to make sure that we've got good security and supply. And we're a big good customer, so we're at the front of the line or near the front of the line when it comes to procuring material from just about any supplier.

Okay. Makes sense. Thanks, guys.

And we'll move to our next question from Phil Gibbs with KeyBanc Capital Markets.

Hey, Jack, Dan, Melinda. Good afternoon.

Hey, Phil.

I had a question on just the maintenance, the planned and the unplanned piece. So the second half, the top end of that, you're at about $20 million of, call it, annualized maintenance. How much of that continues with you to 2016 because I know a piece of that is Trentwood, so just trying to think about that in the right way, obviously, keeping that separate from what happened in auto.

Yeah. I'm not sure where you got $20 million. What we have said...

Run rate, run rate. You said $10 million in the second half...

Yeah.

...so, I'm just saying relative to that rate.

Yeah. The second half and that was a combination of major maintenance expense as well as the disruption that occurred from the major equipment outage. Typically, for example in the fourth quarter, if you follow my math, the fourth quarter could be two to four or worse than the first half but that will be essentially all expense related to the projects that we're going to anticipate any disruption to the operations. So we do a lot of major maintenance on our equipment and our facilities around the system every year. Seldom does it have a mentionable impact but this was such an extensive outage on so much equipment at Trentwood that it had a big dollar impact in terms of our cost efficiencies. But, in terms of our actual major maintenance spending in 2015, we said a few times early in the year that it was rear-end loaded. It was light in the first half and was heavy in the second half but when we look at the full-year, actual expenses can be very similar to actual expense in 2014 with the caveat we had another $3 million or $4 million or so of disruption cost at Trentwood related to the outage if that all [indiscernible].

Okay. So, some of that $6 million you had in your release relates to the disruption?

Exactly. Yeah.

And some of it is planned, some of it is planned too though?

Well, yeah. I forget the exact numbers but a couple of million dollars was the true major maintenance expense. In addition, over and above what we spent on as a run rate last year or first half of the year. But there was around $3 million to $4 million of inefficiency costs at Trentwood related to the major activities that we were undertaking there. I mean, the hotline was down for several days. The structure was down for several days. So we lost 6% throughput in total, but we also had disruption to the operations. Our flows got disrupted, so it created all kinds of inefficiencies even on equipment that wasn't down for the outage.

But that wasn't necessarily a surprise.

No, it was all planned. That was part of that $10 million that we stated on the last call. Good point, Dan.

Right. The only thing that really seemed to be a surprise to you was the automotive...

Exactly.

...piece.

Exactly. That was...

Okay. And you called that out as $2 million to $3 million on an annualized basis in Q3, right?

Yeah. Yeah. Yeah. Compared to last year, and frankly that's my fault. I've been around the block enough times that I should have known that we were going to get bitten yet on that learning curve. The second quarter was too good to be true.

Nothing goes in a straight line, right?

That's right.

Okay. And then, Dan, you had mentioned something on the senior notes. So you have the opportunity to call those in the middle of next year. Is there a penalty to do so, or is it pretty open for you?

Well, there's a built-in call premium of four and one-eight, I believe. If we call in June of next year, it was the first call date. It decreases over the year as we go later. But if the economics are as we see them right now and the market doesn't move dramatically, we think it would make sense to do something on or before that even to refinance those bonds.

Okay. Thanks so much.

Thank you, Phil.

[Operator Instructions] We'll move to our next question from Josh Sullivan with Sterne.

Good afternoon.

Hi, Josh.

If we just look at your long-term plans, and Jack, you're the head of the 2025 committee, if I actually have that year right. But on the CapEx outlook, do you see yourself divesting that $40 million to $60 million indefinitely? Just looking at aerospace cycle kicking at some point. Nor is there that much automotive demand that you can – that's a good run rate going forward?

We don't think it would be that low. On the February call, what we said was we expected 50% to 60% this year. But over the five-year period, we expect 50% to 75%. When we get to the next February call, we would probably say it's at the high end of that 50% to 75% range on annual basis. And when you look at it, part of that is expansion clearly in automotive especially. And at some point, it's likely that we're going to pull the trigger on Phase VI. But part of that vision 2025, a big part of it is directed at we see slowing growth in these markets compared to the very rapid growth we've had over the last 10 years where we've had double digit CAGRs on both automotive and our aerospace and high-strength applications. We don't see that kind of double-digit growth continuing over the next 10 years. But what we do see is increased competition. And so, it's incumbent on us to become more and more efficient. And we do that when we've done that with our capacity expansions. But what a lot of people don't know is while we've modernized a lot Trentwood, for example, there are still big portions of Trentwood that looked like the Smithsonian, that go back to the 1950s in terms of some of the equipment that's in there. So as we look at our processing, there are still significant opportunities to upgrade our efficiencies, upgrade our quality, and we'll have spending related to that as we go forward as well. So we expect pretty strong, and Dan mentioned in his comments that he used the word, strong organic investment, sizeable organic investment in his comment. So short answer is we say that the high range of that, 50% to 75%, and we'll be more specific on that when we get to the February call.

Okay. And then just on your repurchasing, some of your high cost out here. But as far as capital allocation, we drive our considerations on that from maybe an accelerated buyback?

Well, I'm not going to say we wouldn't consider it, but I think we prefer to purchase shares in the manner that we have, which we think is more value to existing and ongoing shareholders. And increased debt, when we look at refinancing, what we have here, we'll take a look at what we think makes sense in terms of the size of whatever we would issue at that point in time.

Okay. Fair enough. Thank you.

Okay. Thanks, Josh.

And we'll take a follow-up question from Phil Gibbs with KeyBanc Capital Markets.

Hi. Thanks. Jack, I kind of just want to square up the Q4 volume. It sounds like aerospace volumes expected to be better just because Trentwood is essentially back on track. You're seeing general engineering shipments down, but not nearly as much because of same issues.

Yeah, not nearly as much as normal fourth quarter seasonality because we've got a little bit rebound from Trentwood.

And then auto it sounds like that's staying pretty much status quo at a solid level.

We think there's a little – there'll be a little bit of seasonal impact. It will be down – it will be the weakest quarter probably over the year in automotive. So there is some seasonal demand weakness there although it's continuing to be pretty strong.

Okay. That's what I needed. I appreciate it.

Okay. Thanks, Phil.

And at this time, I'll turn the call back to management for any additional or closing remarks.

Okay. Thanks, everyone, for joining us on the call today and we look forward to updating you on our fourth quarter and full year conference call with some 2016 outlook in February. Thank you.

That does conclude today's conference. Thank you for your participation.