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Edited Transcript of KALU earnings conference call or presentation 22-Feb-17 6:00pm GMT

Thomson Reuters StreetEvents

Q4 2016 Kaiser Aluminum Corp Earnings Call

FOOTHILL RANCH Feb 22, 2017 (Thomson StreetEvents) -- Edited Transcript of Kaiser Aluminum Corp earnings conference call or presentation Wednesday, February 22, 2017 at 6:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Melinda Ellsworth

Kaiser Aluminum Corporation - VP, IR and Corporate Communications

* Jack Hockema

Kaiser Aluminum Corporation - CEO and Chairman

* Dan Rinkenberger

Kaiser Aluminum Corporation - EVP and CFO

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Conference Call Participants

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* Edward Marshall

Sidoti & Company - Analyst

* Evan Kurtz

Morgan Stanley - Analyst

* P.T. Luther

BofA Merrill Lynch - Analyst

* Andrew Quail

Goldman Sachs - Analyst

* Jorge Beristain

Deutsche Bank - Analyst

* Josh Sullivan

Seaport Global - Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Kaiser Aluminum fourth-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the floor over to Melinda Ellsworth. Please go ahead.

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Melinda Ellsworth, Kaiser Aluminum Corporation - VP, IR and Corporate Communications [2]

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Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's fourth-quarter 2016 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com where we've 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 would like to be 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 to statement's actual results or changes in the Company's expectations.

In addition, we have included not GAAP financial information in our discussion, and the reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items from which we'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?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [3]

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Thanks, Melinda. Welcome to everyone joining us on the call today. We'll start with comments on the fourth-quarter and full-year 2016 results and concludes with a discussion of our outlook for 2017 and beyond.

Turning to Slide 5, underlying demand remains solid in the fourth quarter with normal seasonal demand weakness. As we discussed on the previous earnings call, strong shipments and value-added revenue were supported by delivery of the unusually high level of in-transit finished goods inventory at the end of the third quarter.

Sales margins remained strong as the negative impact of competitive price pressure in the fourth quarter was offset by a favorable product mix.

In addition, we continue to benefit from strong underlying manufacturing cost efficiency derived from prior capital investments, as well as focused efforts on process improvements across the platform.

Turning to Slide 6 and a review of the full-year 2016, we achieved record value-added revenue, record EBITDA and record margin. The record value-added revenue was driven by solid demand across our aerospace, automotive and general engineering applications and by lower contained metal costs that enabled increased spreads over metal on certain high value-added products.

Record EBITDA and margin reflects strong sales margins and record underlying manufacturing cost efficiency. While we enjoy tailwinds from solid demand and low contained metal costs during the year, the strong operating performance was the primary driver of the results. Our best-in-class customer satisfaction performance was a key enabler supporting strong sales across our broad product offering, and our previous investments for quality capacity and efficiency across the platform facilitated the strong sales and manufacturing performance.

Underlying management manufacturing cost efficiency was a step change improvement in 2016, reflecting record performance at several locations.

In addition, a focused effort in our purchasing and manufacturing operations around procurement and utilization of scrap resulted in lower input raw material costs. We expect to continue to benefit going forward.

We continue to execute our capital investment program to further enhance quality and efficiency, expand capacity and sustain our strong competitive manufacturing capabilities.

Our total capital spending in 2016 of $76 million was predominately focused on two projects, the $150 million five-year efficiency and modernization project at our Trentwood rolling mill, and the installation of a new press line at our Sherman, Texas facility to further expand our automotive extrusion capacity.

We kicked off the Trentwood efficiency and modernization project in late 2015 to further advance the Company's cost and quality leadership position and to meet continued long-term demand growth.

In addition to expanding capacity and improving the competitive cost position on all products produced at Trentwood, a significant portion of the investment program will be focused on modernizing the legacy equipment and process flow for thin gauge plate to achieve Kaiser select quality enhancements for these aerospace and general engineering products.

The investments at Trentwood in 2016 were preparation to complete major strategic projects in 2017 to expand capacity and enhance cost and quality capabilities. The investments will position us well for anticipated strong sales growth in 2018 and future, years and I'll provide more details on this in the discussion of our outlook.

The new press line at our Sherman facility, combined with the new line we added at our London, Ontario facility in 2015, provides capacity to meet growing demand for our automotive applications.

In addition to the investments to support further organic growth, we returned $66 million to shareholders through dividends and share repurchases.

Consistent with our priorities for capital deployment, we have continued to steadily increase our currently dividend, including a 12.5% increase in early 2016 and an additional 11% in early 2017. Going forward, we will continue to proactively invest in initiatives for organic growth and asset integrity, and we will see complementary inorganic growth opportunities that would create additional value for our shareholders.

In addition, we will continue to emphasize returning cash to shareholders via quarterly dividends and share repurchases.

Now I'll turn the call over to Dan for further discussion of our 2016 results. Dan?

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [4]

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Thanks, Jack. For the full year 2016, value-added revenue grew 3% to a record $813 million, reflecting solid demand across applications, as well as elevated sales margins for certain aerospace and high-strength and general engineering products as we benefited from low contained metal costs for most of the year. Value-added revenue for the fourth quarter grew to $201 million, a 6% increase compared to the prior year fourth quarter and, notwithstanding fourth-quarter seasonality, a 3% increase compared to the third quarter.

Delivery of the higher than normal in-transit inventory that we mentioned on our third-quarter earnings call led to record aerospace and high-strength shipments in the fourth quarter. Aerospace and the high strength value-added revenue of $119 million in the fourth quarter was a 9% increase compared to both the fourth quarter of last year and the third quarter of 2016.

For the full year, aerospace and high-strength value-added revenue grew 4% to $467 million, an $18 million increase over 2015 as lower contained metal costs for most of the year supported improved sales margins on relatively flat volume. Increasing underlying metal prices late in the fourth quarter of 2016, however, have more recently been squeezing sales margins on some of these products.

Value-added revenue for automotive extrusions in the fourth quarter of 2016 declined 5% to $26 million from the third quarter, reflecting normal year-end seasonality. Compared to the prior year fourth quarter, value-added revenue declined 4%, reflecting lower bumper shipments due to delayed and slower ramp-ups of new programs.

For the full year, value-added revenue for automotive extrusions was $112 million, a slight improvement over the prior year. Growth in chassis and structures, driveshaft tube and antilock brake systems was offset by a decline in bumper programs shipments as some legacy programs came to the end of their lifecycles and new bumper programs were delayed and ramped up much slowly than expected.

Going forward, we expect moderate growth for our mature ABS and driveshaft products, as well as a transition by our driveshaft customers to smaller redesign solutions. Meanwhile, we expect stronger growth for chassis structures and crash management systems as these applications present greater opportunities for further lightweighting with aluminum extrusions. These applications are also more platform specific and tend to be lower value-added parts.

Value-added revenue for general engineering products was $51 million in the fourth quarter of 2016, down 4% from the third quarter on normal year-end seasonality, but up 7% compared to the prior year fourth quarter on stronger shipments.

For the full year, general engineering value-added revenue of $211 million reflected a year-over-year increase of 6% or $11 million. Shipments were higher across all product categories, but pricing pressure on general engineering plate continued from foreign competition.

Turning to Slide 8, fourth-quarter 2016 adjusted EBITDA was $52 million, a $7 million improvement over the third quarter, largely due to earnings recognized upon delivery of the in-transit inventory previously mentioned. Lower major maintenance expense and favorable usage of recycled scrap also contributed to sequential EBITDA improvement.

Compared to the prior year fourth quarter, adjusted EBITDA improved $12 million or 31%. Favorable sales impact and improved utilization of recycled scrap each contributed $5 million to the improvement from the prior year quarter, while manufacturing cost efficiency contributed an additional $3 million.

Additionally lower major maintenance expense offset higher incentive compensation expense. EBITDA margin also improved in the fourth quarter to 25.8%, up significantly from 20.8% in the prior year quarter. Adjusted EBITDA for the full-year 2016 increased $24 million to a record $207 million, a 13% increase over 2015. EBITDA margin in 2016 of 25.4% was also a record, up from 23.2% in the prior year.

Demand was strong across product categories, and elevated sales margins due to lower contained metal costs for most of the year contributed $15 million to the increase in EBITDA. An additional $13 million of improvement in adjusted EBITDA resulted from greater utilization of recyclable aluminum scrap in lieu of more expensive primary aluminum and alloy metals. The benefit from using recycled scrap depends heavily on its trading discount relative to aluminum -- primary aluminum, a marketing condition that we don't control. However, through coordinated efforts by our metal procurement group and managers at our casting locations, we were poised in 2016 to increase scrap usage when we saw attractive scrap pricing opportunities. We will continue our focus on optimizing scrap and primary aluminum inputs to capitalize on future pricing opportunities.

Another $14 million of EBITDA improvement in 2016 was due to further manufacturing cost efficiencies from leveraging equipment upgrades, as well as from focused efforts across our facilities on process improvements. We expect to reap similar if not greater benefits from these institutionalized improvements in future years.

Partially offsetting the improvements were higher benefits across costs that we have noted throughout the year and $11 million in increased incentive compensation expense due to year-over-year improvement in key performance metrics and our financial results.

Moving to Slide 9, operating income as reported for the fourth quarter was $45 million, a $10 million improvement over the prior year as the $12 million year-over-year improvement in the fourth quarter EBITDA was partially offset by $1 million of additional depreciation expense and $1 million of lower net non-run rate gains.

For the full year, operating income as reported of $178 million reflected $19 million of mark-to-market gains on our hedging positions, as well as $8 million of asset write-downs and $3 million of EBITDA expense, all of which were non-cash non-run rate items.

Excluding these non-run rate items, adjusted consolidated operating income was $171 million, up 13% compared to $151 million in the prior year. The $20 million improvement in adjusted operating income reflects the $24 million increase in EBITDA previously discussed, partially offset by $4 million of higher depreciation expense.

For the full year, reported net income was $92 million or $5.09 per diluted share. In the prior year, we reported a net loss of $237 million, reflecting a non-run rate $308 million after-tax non-cash charge, triggered as we terminated defined benefit accounting with respect to the Union VEBA. Adjusting for non-run rate items in both periods, full-year adjusted net income for 2016 was $87 million or $4.83 per diluted share compared to $72 million or $3.95 per diluted share in 2015.

The $15 million increase in 2016 adjusted net income reflects higher adjusted operating income, partially offset by expenses incurred as we redeemed and refinanced our 8.25% senior notes.

The effective tax rate for the fourth quarter and the full year of 2016 was 38%, but our cash taxes were immaterial as our pretax income continued to be shielded by net operating loss carryforwards. At the end of 2016, our remaining net operating loss carryforwards totaled $414 million.

As Slide 9 shows, our 2016 adjusted EBITDA of $207 million funded all of our cash requirements during the year, including sizable capital investments, working capital requirements, VEBA contributions, interest payments, and cash return to shareholders through dividends and share repurchases.

Also, in the second quarter, we opportunistically issued $375 million of 5 7/8% senior notes and redeemed our 8 1/4% senior notes. The refinancing extended our debt maturity from 2020 to 2024, reduced our interest rate on our debt and raised incremental cash proceeds of $162 million.

Our annual cash contributions to the Union and Salaried VEBAs have varied from zero to a maximum of $20 million, depending on the earnings and cash flow from the prior calendar year. Based on 2015 results, our contribution last year was $19.5 million. With even stronger earnings and cash flow in 2016, our contribution this year will be the maximum of $20 million. It will be paid later this quarter with $17.1 million to be paid to the Union VEBA and $2.9 million to the Salaried VEBA.

Our obligation to the Salaried VEBA continues into the future with contributions capped at $2.9 million per year. Our obligation to the Union VEBA ends later this year on September 30, 2017, and our final contribution based on our earnings and cash flow for the first nine months of this year is capped at $12.8 million and will be paid in early 2018.

Capital spending in 2016 totaled $76 million and was concentrated on the Trentwood modernization product and additional investments to support automotive growth, including a new extrusion press and related equipment at our Sherman, Texas facility.

We continue to provide a cash return to shareholders through quarterly dividends and share repurchases. We paid $32 million in dividends in 2016, and after increasing our quarterly dividend in each of the last five years in January of 2017, our Board demonstrated continued confidence in our long-term business outlook by further increasing our quarterly dividend 11% to $0.50 per share.

We also continued our structured and disciplined share repurchase program during the year, spending $34 million on share repurchases. Approximately $88 million remain available for further share repurchases under our existing board authorization as of year-end.

During the year, we enhanced our financial flexibility to pursue organic investments and potential inorganic investment opportunities, and we maintain a strong liquidity position, ending the year with borrowing availability on our revolving credit facility of more than $275 million and cash and short-term investments exceeding $285 million.

And now Jack will discuss our outlook for 2017. Jack?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [5]

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Thanks, Dan. Turning to Slide 11 and the outlook for our aerospace and high-strength applications, market fundamentals are unchanged. We continue to expect industry demand growth at a 5% compound annual growth rate over the next three years, supported by order rates that are sustaining the large nine-year order backlog for commercial airframes. Further supporting the integrity of the backlog, Boeing recently announced that deferral requests are running at 2% of the backlog compared to the historic rate of 6%. We reiterate our outlook for solid demand growth over the next three years for these applications.

However, as we mentioned on our third-quarter earnings call and in last evening's earnings release, we expect destocking in 2017 as the commercial aerospace supply chain inventory adjusts to revised production forecasts for larger airframes. While we expect increased real demand in 2017, the destocking impact is expected to temporarily reduce industry demand for our aerospace and high-strength products by approximately 5% in 2017 compared to 2016. The decline in 2017 demand is not out of the ordinary and is expected to be a temporary pause in the steady long-term demand growth for our aerospace and high-strength applications.

Similar to our past experience, we expect to emerge from 2017 with strong industry demand approaching 10% annual growth for these applications in both 2018 and in 2019, driven by growing commercial aerospace builds, recovering growth for business jets and solid growth for military aircraft, including both domestic and international demand for the joint strike fighter and prior generation aircraft.

We're very well-positioned in the marketplace, and despite supply chain destocking, we expect our strong competitive position will support shipments for these applications this year similar to last year. As we have previously experienced during periods of destocking, we anticipate competitive price pressure on our noncontract business as competitors react to the destocking situation with price reductions.

Turning to Slide 12 and our outlook for automotive extrusions, the fundamentals are unchanged. We expect aluminum extrusion content to continue to grow at a 6% compound annual growth rate over the next three years as OEMs pursue lightweighting to achieve increased fuel efficiency. North American build rates are expected to maintain the 2016 pace over the next three years with a small decline of approximately 1% year over year in 2017 before returning to a pace similar to 2016 in both 2018 and 2019.

Our served market demand for automotive extrusions includes both mature applications such as antilock braking systems and drivetrain components and growing applications, including chassis and structural components and crash management systems. As we experience sales growth for platform-specific chassis structures and crash management systems, our product mix is becoming more platform specific.

In 2016, our sales fell short of our expectation because of delays in the launch of several new platforms containing our products. In 2017, while we expect double-digit growth in shipments, we anticipate single-digit growth and value-added revenue as our product mix evolves to lower value-added parts.

The reduction in our 2017 outlook for automotive value-added revenue compared to our October comments reflects a reduction in the OEM's build forecast for specific platforms containing our crash management systems.

Looking longer term, we expect to continue to enjoy strong growth for aluminum extrusion content and remain very well positioned with capacity capability and market presence to capitalize on these automotive extrusion growth opportunities.

Moving now to Slide 13 and our industrial applications, after slightly negative growth in our shipments and value-added revenue for general engineering applications in both 2013 and 2014, we've experienced positive growth over the past two years, driven by improving broad-based industrial demand for our applications.

As we enter 2017, we're cautiously optimistic as demand in bookings are brisk. However, as discussed on several prior earnings calls, we continue to experience competitive price pressure from imports. More recently, increasing metal costs are adding to the pressure on our value-added prices.

Turning to Slide 14 and our outlook for the first half, we are experiencing some headwinds from destocking in the commercial aerospace supply chain, a squeeze on sales margins from both competitive price pressure and rising contained metal costs, and planned equipment outages at Trentwood related to execution of our five-year $150 million strategic efficiency and modernization program.

Despite the destocking, we expect our market presence to enable us to maintain strong shipments volume this year. However, competitive price pressure combined with rising contained metal costs could erode first-half 2017 sales margins by as much as 150 to 250 basis points year over year as pricing migrates towards levels that we experienced under similar conditions in 2014.

In addition, we have significant planned construction activity in the first nine months of 2017 at Trentwood, including an upgrade of our vintage horizontal heat treat furnace to improve our quality and cost capability for light gauge plate and the installation of a new heavy gauge sheer plus other equipment upgrades on the hot line to drive improved quality and efficiency, as well as further capacity expansion.

These projects are integral to the $150 million multi-year capital investment program at Trentwood to further improve quality and efficiency and to increase capacity by 5% to 10% in 2018 when we expect strong aerospace demand growth.

In addition, the projects will enable us to achieve Kaiser's select quality standards, as well as a step change reduction in conversion costs for our thin gauge plate products.

These projects have been planned to minimize disruption to our operations; however, with major construction activity, plus planned equipment outages, we anticipate that during the first nine months this year our manufacturing efficiency will fall short of the step change record 2016 performance level. So bringing all of these elements together and summarizing our outlook for the first half, we expect value-added revenue down 1% to 3% compared to the first half last year related to the destocking, the planned equipment downtime, and 150 to 250 basis points of reduced sales margin related to competitive pricing pressure and rising contained metal costs, major maintenance expense approximately $5 million higher than the first half last year and reduced manufacturing efficiency from operational disruption and equipment outages related to the planned strategic Trentwood capital and maintenance projects.

The combined effect of lower sales margins, higher planned maintenance spending, and reduced operating efficiencies is expected to drive our first-half adjusted EBITDA margin as a percentage of value-added revenue to the low 20s%.

Turning to Slide 15 and the outlook beyond the first half of this year, our fundamental themes are unchanged. We expect that the commercial aerospace supply chain inventory overhang will be confined to 2017, and we expect that strong industry demand growth for aerospace and high-strength applications approaching 10% in both 2018 and 2019 will boost our shipments and relieve downward pressure on noncontract sales margins.

We also anticipate improving manufacturing efficiencies beginning in the fourth quarter as Trentwood returns to a normal operating environment and has the opportunity to begin capitalizing on the benefits provided by the strategic equipment upgrades being implemented in the first nine months of this year.

These benefits should continue in 2018, 2019 and beyond as demand strengthens and we fully implement improved practices and capacity expansion enabled by the equipment upgrades.

As mentioned in my earlier remarks, we expect increased major maintenance spending of $5 million year over year in 2017, primarily related to the projects at Trentwood with most of the year-over-year increase occurring in the second quarter. Capital spending is expected to be approximately $80 million for the year, primarily focused on the strategic Trentwood projects, as well as operational integrity projects throughout the manufacturing program.

Our capital allocation priorities are unchanged with organic investment as our top priority, followed by investment in complementary inorganic opportunities and return of cash to shareholders via regular dividends and share repurchases.

Turning to Slide 16 and summarizing the total of our comments today, not to be lost, we achieved step change record results in 2016, driven by very strong performance throughout our operations. In 2017 we'll have a more challenging year with destocking and significant strategic project work at Trentwood. That's the bad news. The good news: we are very bullish about our prospects in 2018 and 2019. We expect destocking to be short-lived. We expect anticipate very strong command growth in 2018 and 2019. The project work at Trentwood this year will position us well by providing expanded capacity to address growing demand and by further enhancing our quality and efficiency from the step change improvement already achieved in 2016.

We're confident that our strategy to maintain a low-cost position and to provide high-quality differentiated products to our growing aerospace, automotive and industrial markets will continue to drive long-term growth for our shareholders.

We will now open our call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Edward Marshall, Sidoti.

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Edward Marshall, Sidoti & Company - Analyst [2]

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So I wanted to talk about the aerospace destocking. I think you talked about it at length. I just want to understand what product line -- is that extrusions or plate or is it both?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [3]

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Let's go back to the reason for the destocking. It's primarily because the longer-term production forecast for large airframes had been reduced, and large airframes have a much higher content of plate than the other products. So the most significant destocking impact is on plate products, although we're seeing a little bit of it in other products just because they are not as heavily used in the large airframes.

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Edward Marshall, Sidoti & Company - Analyst [4]

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So maybe we're getting into some dangerous territory, but I'll ask -- extrusions are slightly higher margins, I think, for the business overall than plate. How do I think overall about kind of aerospace margin as we move into 2017?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [5]

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Well, extrusions have a much higher value-added revenue per pound. Margins as a percent of value-added revenue are similar. So they have a much higher dollar per pound margin but similar percentage of value-added revenue.

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Edward Marshall, Sidoti & Company - Analyst [6]

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Got it. Okay. Secondly, I wondered if you could quantify the basis point improvement from lower contained metal prices either for the year -- actually for the year and for the quarter itself?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [7]

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It's really difficult to do. We tried to do that, but it's really hard to separate. The product mix is so diverse, and it's really hard to separate how much is contained metal, how much is product mix and how much is actually price action in the marketplace. But it was significant components of both.

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Edward Marshall, Sidoti & Company - Analyst [8]

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Got it. And you talked about low 20s% EBITDA margin for the first half. I'm kind of curious with the backdrop that you laid out for 2017, as you get through the maintenance and maybe some of the destocking, how does the second half relate to kind of, say, the first half/second half of 2016 from an EBITDA margin perspective?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [9]

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Well, we think the third quarter will look a lot like the first two quarters. So this is really a nine-month phenomenon rather than a three-month or six-month phenomenon, although that $5 million of incremental major maintenance will be concentrated in the second quarter. So the first and the third quarter won't have that $5 million bite compared to prior year -- approximately $5 million bite.

So the fourth quarter should start to come back. It's way too early to predict what pricing will look like by the time we get to the fourth quarter. In the fourth quarter, we usually have seasonally weaker demand, so that has a tendency to drive down margins as well. So, at this point, it's hard to predict margins.

The only thing that we'll predict as we get to the fourth quarter is that we expect to see improved operating efficiencies, and we'll start to put a finer focus on that as we get closer to the second half of the year.

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Edward Marshall, Sidoti & Company - Analyst [10]

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I guess if I could just reask that a different way, I guess if I look at your business over the last couple of years, you've run into the mid to high teens -- 26%, 27% EBITDA margins in the first half of 2016. I'm kind of curious as to the benefit that you may have received from contained metal costs and maybe what the normalized EBITDA margin for your business. I know there's a lot of moving pieces here that we kind of can think about once you get through this need.

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [11]

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Sure. Let me just walk through that. So let's start with the first half of 2016, the roughly 26.5% margin and then come to what we've signaled for the first half of this year that gets us into the low 20s%.

Start with pricing and that's a combination of competitive price pressure and higher contained metal costs, a combination of those two, right now we see those driving our sales margin down by 150 to 250 basis points. So that's the pure pricing impact, and those price levels are migrating to levels similar to what we saw in 2014 when we had the last bout of destocking. So since between 2014 and 2016, we picked up about 250 basis points of pricing, and that was a combination of lower metal prices and of less pressure on competitive pricing. We've got price increases, especially in the second half of 2015, that carried into 2016.

So where are we in the future? Are we going to be at 2014 levels or 2016 levels? We don't count on 2016 as being a permanent scenario, nor do we count on 2014 -- we think it would be somewhere in between -- that zero and 250.

Major maintenance in the first half, that $5 million of incremental major maintenance year over year, that takes out about 100 basis points of margin. So now you are up to 250 to 350. And then efficiency we had, as Dan said in his remarks, we had substantial efficiency benefit. I think the number was [14], so it was over 200 basis points of margin that we gained on cost efficiency.

So, if you take out -- if we get somewhere between where we were in 2016, which was all-time record performance and where we were in 2015, you can get another 100 or 200 basis points. So if everything else remains equal, it gets you between 350 and 550 basis points or 21%, 23% margin, somewhere in the low 20s% range.

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Edward Marshall, Sidoti & Company - Analyst [12]

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Got it. Perfect. Thanks for the clarification. I really appreciate it.

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Operator [13]

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Evan Kurtz, Morgan Stanley.

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Evan Kurtz, Morgan Stanley - Analyst [14]

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So I had a question on trade. You mentioned that the GE plate was under some pressure from increasing imports, likely to continue into 2017. We have an Administration now that seems to be very receptive for trade cases. Is this something that's being discussed or contemplated at this point?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [15]

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We talk about it obviously like everyone talks about it, what's going to happen here. Obviously we don't know, we don't plan on it, but if we get some kind of control on imports, frankly, it would be beneficial to us. Because we're convinced that some of the price pressure that we're seeing is a direct function of unfair trade.

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Evan Kurtz, Morgan Stanley - Analyst [16]

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Right. Okay. And who usually takes the initiative on those sorts of things in the downstream aluminum industry -- is there an industry body that would spearhead some sort of trade action, or would that have to be some sort of organization amongst the actual companies?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [17]

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I think it will be the trade organization where we all coalesce. It may not be everybody in the trade organization, but that's a place where we can gather and take that kind of action.

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Evan Kurtz, Morgan Stanley - Analyst [18]

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Okay. And then maybe just one other question on recycling. You mentioned that that's something you've been working hard on. Where are you right now just ballpark as far as your scrap usage as a percentage of your total metal purchase, and what are kind of the technical limitations upon where you actually think you can get to as far as using scrap?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [19]

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Well, the answer in terms of scrap utilization is really a function of the product mix. The general engineering products, long products in particular, we can get very, very high scrap utilizations and have historically.

The high-strength aerospace and high-strength applications we're able to utilize less scrap than we can in most of the general engineering and the automotive applications.

Are we at saturation in 2016? I think we're pretty close to our full potential in terms of scrap utilization. We continue to push for improvements, but we've really made step change improvements in 2016.

Going forward I think it will be more a function of availability of scrap. We had good availability in 2016, which really facilitated our efforts. As we were ramping up our ability to consume scrap, we had favorable market conditions.

So we think we're pretty much where we should be long-term in terms of utilization. Now it will be a function of what are the spreads compared to prime and what's the availability of scrap as we go forward.

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Evan Kurtz, Morgan Stanley - Analyst [20]

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And can you say exactly how many pounds of scrap that you purchased in 2016?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [21]

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No. We have the number somewhere, but again it's so diversified by plant and by product that it becomes a meaningless number.

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Evan Kurtz, Morgan Stanley - Analyst [22]

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Okay. Great. I'll hand it over.

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Operator [23]

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P.T. Luther, BofA Merrill Lynch.

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P.T. Luther, BofA Merrill Lynch - Analyst [24]

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I wonder if we can talk a little bit more about the aerospace market, what you're seeing there? In the prepared remarks and in the release, you talked about 5% demand decline because of the destocking going on. But you guided to similar shipments year over year in aerospace and high strength. So I just want to be sure -- should we infer that share gains are anticipated in that market? Is that where that delta is coming from?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [25]

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If the market is down 5% and we are flat, that would be a share gain, yes.

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P.T. Luther, BofA Merrill Lynch - Analyst [26]

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Okay. And is there any particular product or just trying to think is it a different product that has a different VAR per pound or margin?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [27]

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No, what it gets back to in terms of share, share is a function of who our clients are versus the total mix of clients in the market space or marketplace. So it doesn't necessarily have anything to do to any specific short-term action we've taken. It's more a function of how things change within the mix of customers that we have and our position with those customers.

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P.T. Luther, BofA Merrill Lynch - Analyst [28]

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Okay. Understood. Thanks. And can you also update us on lead times in aerospace plate and the unit overhangs there if you see it? I think you said -- I want to confirm you anticipate it lasting through the bulk of this year. Do you think there's a chance it could alleviate sooner than that?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [29]

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The lead times are in the seven- to eight-week timeframe right now. We see the destocking running through most of this year. We're pretty confident it should be essentially cleaned up by the end of the year, although there is nothing ever quite that precise. But that's certainly the way it looks right now. So basically we're seeing 2017 that what you see is what you get, but that we're really, really optimistic that it's going to bust loose coming in 2018 and 2019.

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P.T. Luther, BofA Merrill Lynch - Analyst [30]

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Got it. Okay. Thanks for that. And then final one for me, and then I'll turn it over. The big trend with facility upgrade that you're working on, is there a way you can kind of give us a sense or ballpark of what that could translate into for all your earnings once that's running? Because I know you said that the focus on this upgrade is more on cost efficiencies than it is on volumes. So I'm wondering how we might think about what margins might ultimately look like once that thing is in place and running?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [31]

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Well, what we've been saying for quite some time is that we continue to believe that the long-term potential for this business is to get into the high 20s% in terms of margin. We got to 26.5% first half of last year. That is sustainable last year through a full year when you get down to the weaker demand in the second half. But we're very confident still that we can get this to the high 20s% in terms of margin with additional value-added revenue growth from where we are now into the [900s] in terms of value-added revenue as we go forward. And those are really primarily a function of capacity growth at Trentwood and as well as capacity or sales growth shipments growth in automotive, combined with significant cost reduction we expect.

So it's really if all of those factors come together, I wouldn't want to just tie it directly to that because this doesn't complete the work that we're going to do at Trentwood. We still have capital projects beyond this year, important capital projects that will continue to drive efficiency. But we're confident we're going to drive efficiency and drive our margins. Even if we don't get it in sales price or sales spreads, we're going to get it through efficiency and volume that absorbs our fixed costs.

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P.T. Luther, BofA Merrill Lynch - Analyst [32]

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Got it. That's really helpful. Thanks, again, Jack. Appreciate it.

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Operator [33]

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Andrew Quail, Goldman Sachs.

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Andrew Quail, Goldman Sachs - Analyst [34]

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Thanks for the update. Congrats on a very solid quarter. My first one is on SG&A. Have you guys got any guidance as we head into 2017? I would say an increase of around $7 million or $8 million last year. That's obviously been consistently sort of increasing the past several years. Can you give us some guidance what we should expect this year?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [35]

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We're looking for overhead. I'm going to let Dan answer this.

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [36]

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I don't have a precise number here for you, but we are trying to manage some overhead levels, trying to keep it level as a target. Also, the challenges that we are facing there with benefits cost that continue to increase that happened throughout this last year and for the last several years. In overhead I think you are also going to be counting the numbers that you are seeing the incentive compensation that we saw. Again, this was a very good year for Kaiser. So we had very good performance financially, as well as on key metrics that we are rewarding folks for attaining. And as we go into next year, obviously the financial results are probably not going to be as strong as they were in 2016. So that will be a factor, too, as you look at the overhead.

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Andrew Quail, Goldman Sachs - Analyst [37]

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And that EBITDA walk you have on Slide 8, that $19 million, I'm pretty sure most of that is SG&A, is that right?

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [38]

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Say that again?

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Andrew Quail, Goldman Sachs - Analyst [39]

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On Slide 8, your EBITDA walk.

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [40]

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Yes, yes. That's mostly going to be, the overhead is in there. In fact it's mostly overhead.

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [41]

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And benefits.

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [42]

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And benefits, I mean -- but that's part of the overhead as well.

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Andrew Quail, Goldman Sachs - Analyst [43]

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Got it. And Jack, just to be 100% crystal-clear on this aero guide -- you're saying it's negative 5% and then the 10% in 2018, 2019. Obviously it's revenue, right?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [44]

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Yes, revenue; correct.

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Andrew Quail, Goldman Sachs - Analyst [45]

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Value-added (multiple speakers).

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [46]

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Yes -- now, that's industry demand growth. So that's not necessarily our sales forecast. That's what industry demand looks like.

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Andrew Quail, Goldman Sachs - Analyst [47]

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Got it. And did you guys have -- I mean, do you think you have any sort of breakdown of what that would be versus the content growth versus, like, overall volumes?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [48]

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Well, it's hard to say content growth, because it's really a function of the mix of airframes that they will be producing. So if you go back to the prepared remarks, we are seeing steady growth and if you look at the slide deck that we put out last night or that we have today -- but we put it out last night I think with the earnings release -- back in the appendix, we show the outlook for builds, and you can see total builds steadily growing over the next three years. But the de-stocking actually this year -- the real demand is positive, but the de-stocking moves the industry demand down to a negative level.

But then we've got the added boost that we also mentioned in the prepared remarks -- business jet volume is improving, then it's been languishing for several years. And military is really beginning to pick up. The Joint Strike Fighter is ramping up, but we're also seeing strong demand for some of the prior-generation military airframes, both domestically and internationally.

So, defense or military applications really have become a good news story in this as well. So we're really, despite what we read -- some of you guys on the sell-side say, we, I mean the people we talk to -- our customers -- we are very, very bullish about the outlook here in 2018 and 2019.

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Andrew Quail, Goldman Sachs - Analyst [49]

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Are there any sort of signposts that you guys look are looking for, sort of as you head through 2017, that will show that this de-stocking phenomenon is actually short lived and won't last into 2018?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [50]

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Well, I mean, we'll see it as the year unfolds. We're probing our customers every day. So we're really monitoring this very, very closely. This is very recent information. I mean, we put this together a couple months ago, but we've been pushing it the last week or two before the call to validate that these numbers and these forecasts are still true. So, everything that we know right now, we're pretty confident that it's going to be this year, it's going to last most of the year this year, but it should be cleaned up.

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Andrew Quail, Goldman Sachs - Analyst [51]

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Thanks very much for the update, Jack.

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Operator [52]

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(Operator Instructions)

Jorge Berenstain, Deutsche Bank.

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Jorge Beristain, Deutsche Bank - Analyst [53]

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Good afternoon. Hey, Jack, maybe my question is more for Dan; he brought it up. On slide 12 of your slide deck, you talk about the split right now that you have between the automotive end markets and at the -- you mentioned the ABS and the drivetrains are mature. Those were being substituted by chassis, structural; and I thought I heard Dan say that the structural were more lower-value-added. Could you just clarify if I heard that right? And just also talk about just generally the mix change that's going on in auto? Do you expect it to be more or less value-added than your historic blend per pound? And then talk as well about margin.

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [54]

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Sure. I mean, that the answer was yes; you did hear me say that the growth opportunities, which were chassis and structures and the bumper systems, those are going to be lower-value-added than our existing product mix has been. And so, when we see growth for the opportunities in automotive, it will be growing into those lower-value-added products. So the mix will shift. I think Jack spoke about the mix shifting in that direction as well.

And I think that's basically the answer to your question. Maybe you have something I missed.

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Jorge Beristain, Deutsche Bank - Analyst [55]

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Well, in percentage margin, could you also quantify if it costs less to produce? So, generally speaking, would you expect EBITDA margins, adjusted EBITDA margins to be up or down versus your historic mix, as you cut in the new product?

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [56]

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Yes, generally our product mix is going to have a similar EBITDA to value-added revenue ratio. So even though they may be lower value-added revenue per pound, they'll have a similar margin impact.

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Jorge Beristain, Deutsche Bank - Analyst [57]

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Got it. And then maybe could you talk a little bit about the bumpers? Specifically, I'm just trying to understand, what is it that has led the OEMs to have a slower-than-expected adoption of these crash-management systems? Is it that the models, there's just been less consumer demand, or have they actually slowed the rate of production with some of these aluminum-included kind of crash-management systems? Could you just clarify what is the hold-up there?

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [58]

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Sure. It's really the sales of the models rather than the adoption of the crash management. So the model or the platform is designed with the aluminum crash-management system, but the projected sales for some of those platforms, the specific platforms, have come in lower than anticipated. And that's really consumer preference. So, some of these platforms that everyone thought were going to be really, really strong sales, and as consumer opinions change, the forecast changes. So they shift to trucks or they shift to large sedans rather than some of these SUVs or crossover vehicles. So it's really a function of what specific models are being sold, rather than the design of the vehicle.

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Jorge Beristain, Deutsche Bank - Analyst [59]

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Okay, well I guess you guys could offset that over time if you get spread across enough platforms. So, it just seems like there's no change really in the tone of the OEMs adopting this aluminum; it's just that on those specific models, you're saying you've had kind of bad luck to be on slow-acceptance models.

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [60]

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No, that's exactly it, Jorge. You've got it. It's really -- I mean, we book these things usually two or three years ahead of time before the actual production starts, and then it's just a matter of how successful that model is. But in terms of the content, the content is still growing.

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Jorge Beristain, Deutsche Bank - Analyst [61]

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Okay, thanks very much.

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Operator [62]

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Josh Sullivan, Seaport Global.

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Josh Sullivan, Seaport Global - Analyst [63]

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Yes, just a follow-up on the auto side there. You know, do you think you could comment on where you see the CAFE standards going? I believe there were reports out today of an automotive industry group advocating one way or the other. How do you guys see the process developing, and then how does that layer into your outlook?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [64]

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Yes, who knows where that goes? You know, there's certainly going to be a lot of conversation about it, and the big vehicle manufacturers are pushing hard for a change.

In terms of what it means for us, which is really the more important aspect, rather than the political aspect on this -- we remain very confident regardless of what happens to the CAFE regs, and I'll go back to history. If you go from 1990 through, I'm going to say without looking at some of our charts that are in our business update, through roughly 2005, to maybe even 2010, there weren't any changes in CAFE regs, and during that period of time the content for aluminum extrusions grew at about a 4% CAGR. So we are confident, even if they make changes in CAFE regs they're, not really going -- they're not going to take away the increases in CAFE regs; they may knockdown that 50-mile-per-gallon standard, but the real challenge and the reason that the automotive manufacturers are complaining, is that to get to those 50-mile-an-hour standards require dramatic changes and very expensive changes in engine technology.

But the most cost-efficient way for them to achieve greater fuel efficiency is via lightweighting, which is what was happening for the prior two decades before the CAFE standards started ramping up.

So, we've -- we watch this, obviously. But in terms of the aluminum-extrusion content, we remain confident that regardless of what they do with CAFE standards we think there's still going to be pressure for fuel efficiency from both the regulations, but also from the consumers, and we're very confident we're going to see growing content for our products, whether it's 5% or 6% or whatever the number is -- longer-term, it's going to be very, very strong growth for many years.

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Josh Sullivan, Seaport Global - Analyst [65]

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Okay, thanks for that. And then on the inorganic growth opportunities you highlighted, are there any specific areas you guys are interested in at this point?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [66]

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No, I mean nothing different than what we've said all along. I mean, we'll go outside the current mix. But it needs to be a business that we understand, needs to be complementary to what we do; and most importantly, the big obstacle that we've had over the past five years or so, is that we're not going to overpay, and some of our peers have been grossly overpaying for assets. And we just won't go there.

But if there is a complementary fit for our portfolio, that is there at a reasonable price that creates long-term shareholder value, we're ready to spring for it.

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Josh Sullivan, Seaport Global - Analyst [67]

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Okay. Actually, you know what? Just one last one on aerospace. You know, on the pricing pressure, how much of your product is under contracts versus more spot-market orientation?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [68]

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I've got it in my notes here. I'll have to recall -- I haven't answered this for a while. Dan looks like he has it on the tip of his tongue.

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Dan Rinkenberger, Kaiser Aluminum Corporation - EVP and CFO [69]

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I think we've said pretty consistently, that it's generally about -- and we're talking plate primarily, right?

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [70]

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Well, no, no -- let's go back; our general engineering products are virtually all non-contract. And aerospace and high-strength -- Melinda is going to correct me if I'm wrong; no, she's going to tell me -- Melinda confirms what I was going to say, that aerospace and high-strength is about two-thirds contract, one-third non-contract.

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Josh Sullivan, Seaport Global - Analyst [71]

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Okay, thanks.

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Operator [72]

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Thank you, and that concludes our question-and-answer session for today. I'd like to turn the conference back over to Kaiser Aluminum for any closing comments.

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Jack Hockema, Kaiser Aluminum Corporation - CEO and Chairman [73]

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Okay, thanks, everyone, for joining us on the call. As we said, we've got some headwinds in the marketplace but -- and some big, strategic projects going on at Trentwood that are going to give us some headwinds this year, but are going to give us some really significant tailwinds going forward. We're really, really optimistic about where we're headed in 2018 and 2019, and look forward to migrating this year. And we'll continue to update you on our first-quarter call in April. Thank you.

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Operator [74]

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

Everyone have a great day.