Kaiser Aluminum Corp (KALU) 2016 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaiser Aluminum third-quarter 2016 earnings conference call. (Operator Instructions). I would now like to turn the conference over to Melinda Ellsworth, you may begin.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's third-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. We have also posted a PDF version of the slide presentation for this call.

Joining me on the call today are Chief Executive Officer and Chairman, Jack Hockema; President and Chief Operating officer, Keith Harvey; Executive Vice President and Chief Financial Officer, Dan Rinkenberger, and Vice President and Chief Accounting Officer, Neal West.

Before we begin I would 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, 2015 and Form 10-Q for the quarter ended September 30, 2016. The Company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the Company's expectations.

In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix. At the conclusion of the Company's presentation we will open the call for questions.

I would now like to turn the call over to Jack Hockema. Jack?

Thanks, Melinda. Welcome to everyone joining us on the call today. Turning to slide 5 and recapping our results for the third quarter, underlying demand remains solid with normal seasonal demand weakness. However, due to an unusually high level of in transit finished goods inventory at the end of the quarter, approximately $8 million of value added revenue is expected to be recognized when delivered in the fourth quarter.

In addition, as we had previously indicated during our July earnings call, third-quarter results reflected approximately $3 million of higher major maintenance expense compared to the first-half run rate, primarily related to furnace rebuilds in four of our plants.

The higher planned major maintenance expense and the combined impact of lower value added revenue attributable to in transit inventory and normal third-quarter seasonality drove a 350 basis points decline in our third-quarter EBITDA margin compared to the strong first-half run rate.

I will now turn the call over to Dan for additional color regarding the third-quarter results. Dan?

Thanks, Jack. On slide 6 I will look at value added revenue. As Jack mentioned, because an unusually high amount of aerospace plate inventory produced during the third quarter was in transit at quarter end, the sale of these finished goods could not be recognized until the customer delivery in the fourth quarter.

The delayed recognition of $8 million of value added revenue on this inventory contributed to third-quarter value added revenue declining $4 million or 2% compared to the prior year quarter and $13 million or 6% compared to the strong quarterly pace of the first half of this year. Normal third-quarter seasonality across all end market applications also contributed to the decline from the first-half quarterly pace.

Looking at the third quarter by end use category, aerospace and high strength value added revenue was down 4% or $5 million from the prior year quarter and 9% or $11 million from the quarterly pace of the first half of this year, primarily due to the delayed recognition of value added revenue on the in transit inventory as discussed.

Automotive extrusion value added revenue declined 3% from the prior year quarter and 5% from the quarterly pace of the first half of this year as end-of-life cycle bumper programs rolled off earlier this year and new bumper programs are ramping up more slowly than we expected.

General engineering value added revenue increased 6% over the prior year quarter on incremental sales enabled by the capacity growth from our Trentwood investments. Compared to the first half quarterly pace value added revenue declined slightly due to normal seasonality.

For the first nine months total value added revenue improved 2% compared to the prior year quarter. Aerospace and high strength value added revenue improved 2.5% as modestly favorable pricing was partially offset by slightly lower volume. This increase of course would have been somewhat higher had the recognition of $8 million of value added revenue on the in transit inventory not been delayed.

A 3% year-over-year increase in automotive value added revenue for the first nine months of this year reflected higher value for chassis and structures driveshaft tube and antilock brake systems, offset by lower shipments of bumper products as end-of-life cycle programs rolled off earlier this year and new bumper programs are ramping up more slowly than expected. Nine-month 2016 general engineering value added revenue improved 5% over the prior year period primarily due to higher volume of plate shipments.

Now a look at EBITDA on slide 7. Third-quarter adjusted EBITDA of $45 million and EBITDA margin of 22.8% were comparable to the third quarter of 2015 as the benefits of underlying -- of improved underlying cost efficiency were offset by slightly adverse sales impact and moderately higher major maintenance overhead and employee benefit expenses.

Compared to the first half of 2016 quarterly pace, adjusted EBITDA declined $10 million in the third quarter reflecting $3 million of higher major maintenance expense and an adverse sales impact of approximately $7 million due to third-quarter seasonality as well as the delayed recognition on the in transit inventory.

While our average EBITDA to value added revenue margin is approximately 25% plus or minus a couple percentage points, the incremental EBITDA impact of this in transit inventory, considering the gross margin on $8 million of aerospace plate value added revenue, was about $3 million to $4 million. That is $3 million to $4 million of EBITDA that was not recognized in the third quarter but which will boost fourth-quarter EBITDA.

EBITDA for the first nine months of 2016 improved approximately $11 million to $155 million compared to the prior year with EBITDA margin improving from 23.9% to 25.3%. The year-over-year improvement primarily reflected a favorable sales impact of $19 million, which partially benefited from lower contained metal costs, and an $11 million impact from improved underlying manufacturing efficiencies. These improvements were partially offset by $18 million of higher overhead, employee benefits and incentive compensation expenses.

On slide 8 we show additional consolidated financial metrics. Consolidated operating income as reported of $30 million for the third quarter reflected $6 million of non-run rate losses, including a $3 million non-cash impairment of a customer relationship intangible. Operating income for the prior year quarter was $41 million and included $3 million of non-run rate gains.

Adjusting both periods for non-run rate items operating income was $36 million in the third quarter of this year and $37 million in the prior year quarter. The slight decline reflected a $1 million increase in depreciation expense and, as noted in the third-quarter EBITDA discussion, also reflected improved underlying cost efficiency offset by a slightly adverse sales impact and moderately higher major maintenance, overhead and benefits expenses.

Consolidated operating income as reported for the first nine months of 2016 was $133 million, including approximately $5 million of non-run rate gains. This compares to a $381 million operating loss in the prior year nine-month period that included $500 million of non-run rate losses primarily related to the termination of defined benefit accounting with respect to the Union VEBA in early 2015.

Adjusting for non-run rate items, consolidated operating income was $128 million for the first nine months of this year and $119 million for the prior year period. The $9 million year-over-year improvement reflects the favorable sales and efficiency impacts and partially offsetting increasing overhead, benefits and incentive compensation expenses noted in the nine months comparison of EBITDA as well as $3 million of additional depreciation.

Our effective tax rate was 39% for the third quarter and 37% for the first nine months of the year. Our cash tax rate remains in the low-single-digits as we apply our net operating loss carry forwards against pretax income.

Reported net income for the third quarter was $15 million or $0.82 per diluted share and for the first nine months of 2016 was $67 million or $3.70 per diluted share. Adjusting for non-run rate items, net income was $19 million for the third quarter and $64 million for the first nine months, or adjusted earnings per diluted share of $1.02 for the quarter and $3.54 for the first nine months of the year.

During the first nine months of this year we paid $24 million of quarterly dividends and repurchased approximately 170,000 shares of our common stock for $14 million. Approximately $110 million remains available under our Board authorization for further share repurchases as of quarter end.

Capital spending totaled $57 million during the first nine months of the year and for the full year we expect our total capital spending will be approximately $80 million. Cash and short-term investments totaled $274 million as of September 30 and unused availability under our revolving credit facility was $280 million providing Kaiser with significant liquidity at quarter end. And now Jack will discuss our business outlook. Jack?

Thanks, Dan. Turning to slide 9, as we look to the remainder of the year for our Aerospace and High Strength applications we continue to expect approximately 5% year-over-year value added revenue growth for the full year. In the fourth quarter we expect a value added revenue boost from delivery of the third-quarter in transit inventory partially offset by normal yearend seasonal demand weakness.

Looking ahead to 2017, our lead times for heat treat plate are down to six weeks and we have indications that the aerospace supply chain will experience destocking in 2017 particularly in aerospace plate products. As a result we expect that total aerospace and high-strength industry demand for 2017 will be down slightly from 2016.

There are also signs of increasing competitive price pressure on our aerospace plate non-contract business. You may recall that non-contract orders comprise approximately 25% to 35% of our total aerospace and high-strength shipments. We will provide more color on this along with our full-year 2017 outlook during our fourth-quarter earnings call in February.

Looking longer-term, we anticipate that the aerospace supply chain inventory overhang will be largely addressed in 2017 with supply/demand equilibrium restored in 2018. We recently updated our industry demand outlook for our Aerospace and High Strength served market applications and anticipate that 2019 demand will be up approximately 15% from 2016 driven by increasing single aisle and Airbus twin aisle build rates partially offset by declining build rates for the 747 A380 and the transitioning 777.

Turning to slide 10 and automotive extrusions. With recently announced fourth-quarter assembly plant shutdowns, as well as continued delays in the ramp up of new bumper programs, we are reducing our 2016 outlook from approximately 6% to approximately 2% year-over-year value added revenue growth for these applications. However, even with the modest growth in 2016, we expect to achieve an average annual extrusion value added revenue growth rate of nearly 20% for the current three-year period ending in 2016.

Our recently updated three-year industry demand outlook is for approximately 6% average annual growth from 2016 through 2019 driven by increasing automotive extrusion content. And in 2017 we anticipate double-digit value added revenue growth for our automotive applications as we launch new programs and existing programs continue to ramp up.

Turning to slide 11, we expect normal seasonal demand weakness in the fourth quarter for our general engineering and other applications. And as we have discussed throughout the year, we continue to experience pricing pressure from imports on general engineering plate.

Moving to slide 12 and a summary of our fourth-quarter and full-year outlook. We expect normal fourth-quarter seasonal demand weakness and yearend uncertainty with offsetting benefit from recognition of revenue from the third quarter in transit inventory and from planned major maintenance expense of approximately $2 million lower than the third quarter.

We also expect increasing competitive price pressure on non-contract aerospace and general engineering plate products. For the full year 2016 we expect record value added revenue with 3% to 4% year-over-year growth and record EBITDA and margin driven by sales growth and continued improvement in manufacturing efficiencies.

Turning to slide 13 and a summary of our comments today. Third-quarter value added revenue and EBITDA were impacted by higher than normal in transit inventory that will be recognized in the fourth quarter. We continue to anticipate finishing the full year 2016 with record value added revenue, record EBITDA and record margin driven by sales growth and record manufacturing cost efficiency.

2017 is developing as a transition year for our aerospace and high strength applications with the prospect for supply chain destocking more than offsetting underlying growth in real demand for our products. However, we expect equilibrium in the supply chain by the end of 2017 with the prospect for industry demand growth for these applications of approximately 15% in 2019 compared to the 2016 level.

Automotive is a similar story to aerospace except 2016 has developed as the transition year following explosive value added revenue growth the prior two years. In 2017 we expect strong double-digit value added revenue growth for our automotive applications and the longer-term outlook is for strong secular demand growth.

We remain focused on the long-term with planned investments and initiatives to advance our manufacturing efficiency and product quality and to further expand our capacity to capitalize on the secular growth opportunities in our served market segments.

And we have financial strength and strong operating cash flow to support our strategic investment program, as well as supporting our return of cash to shareholders via regular dividends and share repurchases. We will now open the call for discussion.

Curt Woodworth, Credit Suisse.

I just wanted to drill down more into what you are seeing on the aerospace side. And specifically can you quantify what you are seeing in terms of say your order book that you are building for next year, and give us a sense of the magnitude of the excess inventory you think that could be in the channel?

I will give you some sense now; it is still a little premature. We will put a lot more color and a finer point on that when we get to the February call. We have got a pretty clear idea of what our order book looks like from the OEMs, it is less clear on that 25% to 35% that is the non-contract business.

So -- but in total, and I made a comment in the long diatribe I went through here on aerospace and high strength. But our current view is that real demand next year will be up year over year, but that is going to be more than offset by the destocking.

So without putting a fine point on it, the rough numbers we are working with now, we see real demand growth positive in the low-single-digits next year, but we see the destocking impact taking actual demand on the mills a negative low-single-digits. So we don't think it is a dramatic swing in terms of actual demand on the mills year over year because there is real underlying growth in the overall demand.

Okay, so the low-single-digit volume growth view, that is more specific to your direct OEM customer base and then --?

No, that is in total and that is all products.

Okay.

All aerospace high strength products.

And then can you give us any indication -- you mentioned that you are seeing initial signs of pressure in the noncontract market from an ASP perspective. What level of price degradation are you seeing right now? And then in terms of your contract portion, so ex the 25% to 35% spot, how much of that would be up for renewal this year -- or I'm sorry, in 2017?

Well, the spot business is -- doesn't get renewed, it is basically subject order to order to price changes.

(Multiple speakers).

Yes, the contract portion is locked in on terms of pricing, yes. So in terms of total price it is really a moving target right now even for the fourth quarter. If I had to put a number on it is going to be a really soft number.

I am going to just going to say it is going to be at least $1 million I think of general engineering and some price degradation. We think we are going to have a little bit leaner mix in the fourth quarter than we had the prior nine months. But in terms of price it is going to be at least $1 million and it may go north from there or south, whichever is the proper direction.

Okay, and then would the plan be to try to shift more capacity into GE plate at Trentwood to try to keep that facility running full in the event that we do get a more broad-based destocking event (multiple speakers)?

Well let me bifurcate this. One aspect is demand. And so, we think demand is going to be down slightly year over year. We are not willing to make any comment on what volume will be until we get to February. I am not sure our volume will be down, it might be down modestly. But it may be up next year as well.

So not willing to put a number on that in terms of what it means specifically to us in terms of either volume or price. What I will say is that any price degradation that occurs will not be initiated by us; it will only be us responding to other competitors and maintaining our share.

Okay, that is great. I really appreciate it. Thank you.

Edward Marshall, Sidoti.

So my question I guess is a follow-up on that and just in discussion on mix in aero. And I guess there is a difference between plate, which I think you're referring to in the extrusions. Just looking in the quarter itself, it looks like the extrusion price held up relatively well looking at the mix and price.

When you look out to 2017 specifically, and your comments regarding destocking, is that specifically to plate? And are you still expecting a relatively decent year in extrusions?

Yes, the answer to the second question in terms of the destocking, right now the primary destocking that we are seeing is in plate. We are not seeing any significant impact of destocking and the other products.

Okay. And when you look at general engineering and I anticipate -- I am assuming that when you are referring to the excess capacity that will be in the aerospace supply chain, I am assuming that spills over into general engineering. I think that is what you were saying. Would you (multiple speakers) -- go ahead.

Yes, to some extent that is the case. We will see some of the big aerospace players beginning to migrate into general engineering but still the biggest impact on general engineering right now is the foreign competition, it's the imports.

And I know there is one particular period that you point to all the time that shows kind of how that happened in the past. But could you kind of like maybe think about what the -- because most of your general engineering plate is more sensitive to the pricing changes than say the aero plate just because of the amount of spot in that business. Can you kind of talk about what you would anticipate from a pricing perspective on the general engineering plate versus what you might see in the aero?

Based on the excess capacity coming into general engineering.

Yes, I don't specifically know what it's going to be next year. I mean we have our forecast, but those are done with a Ouija board at this point because it is so volatile order by order.

So you don't know yet.

Yes, but what -- well, what I can say is that 25% to 35% of the aerospace book of business is noncontract whereas 90% plus of the general engineering book of business is noncontract. So you have got almost three to four times leverage on price in the general engineering as what we would have in aerospace just because of the mix of contract versus noncontract.

Got it. And then I think there is a lot of discussion and thoughts on the auto cycle. And I am wondering what might give you the confidence to get the kind of outlook that you looked. I mean is it purchase orders that are kind of sitting there waiting for the demand that is sitting there for 2017 that you anticipate? And what is different say heading into 2016 relative -- what's different going into 2017 than it was say going into 2016 in your confidence level?

Well, we don't have -- one thing that is different in 2017 is we don't have the number of programs expiring in 2017 that we had in 2016. So there won't be that much falling out the bottom of the bucket, if you will. And what is coming in the top is those programs that we are ramping up this year that ramped up slower than expected will continue to ramp up next year and we have a number of additional launches on top of those.

When I said single -- said double-digit value added revenue growth I didn't put a number on that. We have got a pretty wide range on that double-digit growth next year in terms of what it could be if all the programs ramp up as expected, we don't expect that they all will ramp up as everyone is saying they will.

So we will give that a haircut as we go into our outlook in February. But we are very, very confident now with what we see coming in that we should see double-digit content growth and that all anticipates that we will see level builds, which at this point we see no indications that we will be below 18 million builds next year.

Got it. Last question for me, the capital allocation. Looking at your business -- looking at the stock rather and being that it's the 52-week low today. I am curious you have repurchased some stock over the last -- roughly about a year ago or so. I am wondering what your thoughts might be about the capital allocation.

Would you steer -- you have shown the ability to kind of go into the market when the opportunity exists. And I am curious about the thoughts from a capital perspective and whether you might look at stock repurchases as being in place for that capital to go.

Yes. Well, the answer Dan has said consistently when asked this question in this past, that we have a grid and that we buy more at low prices and less at high prices. And we can assure you that we will be buying a lot more at 72 then we buy at 90.

Got it, thanks very much, guys. Appreciate it.

Phil Gibbs, KeyBanc.

Hi, this is actually Tyler Kenyon on for Phil. How is everyone?

Good, Tyler.

Hi, Tyler.

Good. I just wanted to start with just a question on your 2017 aerospace and high strength outlook. What is kind of embedded just with respect to your expected trends when you break it out by product call it plate versus the extrusion side? It sounds like the destocking itself is more impacting the plate business. But any way to be kind of thinking about that mix as we move into 2017 here?

Well, without getting too granular, just qualitatively, as we have commented here on a couple of the other questions, at this point we anticipate the magnitude of the destocking will occur and flat rolled or plate products call it rather than our long products. So we see long products demand being pretty consistent with what real demand is whereas plate demand is going to be compromised by the destocking.

So kind of tracking up in that low-single-digit range that you referenced before?

On the plate --.

On the extrusion side, that is.

Yes, the extrusion side, right now we are looking at positive growth in the low-single-digits area.

Okay, great. And then just a question on scrap pricing --.

Excuse me, Tyler. Tyler let me just put a point on that. I am talking now industry demand, not our sales forecast for next year.

Right, okay. Understood. And then just my next question just on scrap pricing. Any way to quantify kind of what the trend has been there as we have moved through the year here? And kind of maybe what any benefit may have been from lower scrap prices year to date?

We have had strong benefits year over year in what we call metal profits, which is basically the amount of scrap that we are using and the discount that we are getting versus prime. It has been a strong positive for two aspects: it has been -- the prices have been favorable year over year and that has continued in the third quarter. It was really strong in the first half of the year, it has continued pretty much through the third quarter.

But part of it also is our manufacturing operations that have re-melts or have cast houses have done a really good job working with our scrap procurement people to really improve the mix of scrap that they are buying and the consumption of scrap. So we are getting a twofold benefit, scrap discounts have been relatively attractive, but our people are doing a much better job of optimizing their raw material utilization and reducing our total raw material cost.

Okay. And then how should we be thinking about maintenance costs in the fourth quarter relative to third-quarter levels?

Yes, major maintenance in the fourth quarter right now looks like it is a couple million dollars less than what the third quarter was.

Okay. And any particular projects that you will be pursuing in the fourth quarter?

I haven't even looked over the detail of what it is. But they are pretty generic. The third quarter was so high because we typically have furnace rebuilds in the third quarter, but to have four plants going through rebuilds in the third quarter really boosted that cost.

Okay, great. Thank you, that is all for me.

(Operator Instructions). Paul Luther, Bank of America.

I had a question if you could just provide a little more perspective on the lead times that you talked about in aerospace plate being six weeks, because I think they have come in quite a bit. I thought they were maybe 15-ish or something like that back in May.

More like 30 actually, but --.

Yeah, and 30 earlier in the year. So like have you seen -- like how many times have you seen these fall to six weeks? Is this kind of unprecedented or have you seen this before in the cycles with destocking? Just trying to get a better sense of the magnitude of what is happening there.

No, this is not unusual. When you get those unusually long lead times it is not unusual for them to collapse pretty quickly.

Okay. And then on the -- if I could take a step back too, in terms of the aerospace (inaudible) refresh that you alluded to, when you take a look at that do you focus on the OEM build rates and their latest delivery forecast that they provide or do you add your own tweaks to it or it take hair cuts to it? I'm just wondering if you could just provide a little more color on the process that you do on the refresh.

We absolutely do add our own tweaks. We look at what the skyline looks like from the airframe manufacturers, we look at what Airline Monitor has to say, we look at what Teal has to say and then we put our own opinion into it as well just digesting what everyone else is saying plus what we think is realistic.

Okay, cool, makes sense. And then if I could shift gears to general engineering plate and the competitive price pressures. I think we have been -- I am sure you are tired of talking about them, it seems like they have been going on for quite a while. Can you characterize if they have changed at all in terms of if they have gotten stiffer or perhaps eased up over the past couple quarters? And how they look for 2017 and if you think there might be opportunity for trade cases here?

Let me start with what is actually happened to us. The impact on general engineering, while the market has been pretty fierce over the past couple of quarters, our people again have done a really good job of managing their product mix and taking advantages of opportunities in the marketplace and have minimized the impact on us to where it didn't even round up to $1 million in the third quarter compared to where we have been running in the first half. And we were expecting it was going to be quite a bit more than that in the third quarter.

Right now we think it may be, as I said, $1 million or so in the fourth quarter, a combination of aero and 6x or general engineering, but it could grow from there. So does that lead to government action on those products? It is unlikely. Back -- I don't remember the timeframe, I'm going to say it was 10 or 12 years ago even actually Alcoa initiated an action against the South African mills and we were successful in proving that there was dumping.

However -- we joined in that action by the way. However, there was not evidence of damage on the mills because aerospace was so strong and the mills were profitable. And so no tariffs were employed at the time. So we probably have the same kind of situation now where even though we maybe have some transition in 2017 we are still looking at strong secular demand growth here and strong markets. So it is unlikely that we can get tariff applied.

Okay, great, that is really helpful perspective. Thanks for that, Jack. And then the last one if I could and then I will get back in queue. When you talked about the delays in bumper projects, is that just part of the growing pains, the start-up pains of the new products? Or is it -- just wondering if it is driven by the buyers or if it is driven by the launch of start-up pains and launches at your facilities.

It is a combination. We have to start with what our customers tell us is going to happen and we know when they tell us that they are telling us that it is going to be really, really strong because they want to make sure that we are fully capacitized and ready to handle the volume if the model really takes off when they launch it.

So first we have to do that and then we get into the reality of what happens, we make our adjustments to that already versus what the customers are saying. But then you get what actually happens in the marketplace.

And in terms of launches this year there was one particularly very large program that has not -- that particular model has not had very good acceptance in the marketplace. And so their sales of that particular model are significantly less than what they expected and frankly what we expected.

And it is not unusual, you may get delays in the start-up or you get consumers not going for it. Or you can get consumers really going in heavy and it really takes off. So when you are talking about a new program there are really a number of variables in there and it is really difficult to predict what the volume is going to be from the launches.

Understood. Okay really appreciate it, thanks again, Jack.

(Operator Instructions). Anthony Young, Macquarie.

Just on the in transit sales that you guys had for the quarter, is that related or would that be a symptom of the destocking in the aerospace supply chain? Or did you guys just have a big order leave on the last day of the quarter or how should we think about that?

No, we all -- every quarter we have in transit, we have -- we recognize the revenue based on the FOB point. We have some that is FOB, our plant, and so it gets billed and recognized as revenue when it leaves the plant. Other doesn't get recognized until it is received at our customer's operation.

And in this case we had a significantly higher volume of overseas shipments in the fourth -- in the end of the third quarter and those can go to Europe or Asia; you get long, long pipelines there. So it was a lot more material than normal and that is what created that unusually high inventory. But we always have it; it is just a fact that we had a lot more here in the third quarter.

Okay. And so with this quarter being a lot higher, you guys experienced the cost of goods sold in this quarter also?

The costs get capitalized in the inventory. And so the cost does follow when the recognition occurs.

Okay, okay. And then just with respect to the aerospace supply chain and you guys talked a little bit about having your own estimates with respect to how the destocking may work. But I mean in your opinion, the destocking is going to occur next year, is that just to sort of get on sides with where Boeing and Airbus are on the A380 and 747 cuts? And if there may be another round in the 777 this destocking could last longer? Or how should we think about that?

Well, typically we get a pretty small window from the OEMs in terms of what our demand will be from them for the next full year. So we have got a pretty good idea what we will have in 2017 within a relatively tight band.

And then 2018 really depends on right now we are anticipating what we think the builds are going to be in 2018, 2019 and 2020 and that is what leads to our outlook for demand, because we think that they are taking action now that pretty much gets that supply chain in balance.

But if they change or we change our outlook in terms of what the builds are going to be in 2018 and 2019 and 2020 versus what we have now, then that could create additional destocking in future years. Or it can go the other way, obviously.

Right, right. Okay I appreciate the questions, guys.

Jeremy Kliewer, Deutsche Bank.

Just kind of following up on the comments of the $3 million to $4 million of EBITDA from the in transit product, those margins came from relatively high anywhere between 38% and 50% of your value added revenue. So I was just trying to tie that, is this a large commercial customer, are these other aerospace products or where is that falling in your bucket of volume?

Well, we won't make a point of calling out customers other than just saying it was aerospace plate. And the real issue here is what is the incremental impact to EBITDA, which is not going to be 25%, which is that is the whole portfolio.

It is going to be higher.

So I think it is not unnecessary -- unreasonable to assume that it could be in the territory that you were talking about, in the 30% to 40% in terms of incremental impact.

Yes, but remember what gets booked or capitalized into inventory is the cost of goods sold that does not capitalize SG&A, R&D and all those operating expenses. So, it is more than just the EBITDA, it is also covering all of those other overhead expenses that do not get capitalized in inventory. So that is why you get a much higher margin than the average EBITDA. And if you go do the calculations of what our gross profit is it is typically running 35% to 40% -- or 40% plus on our average product mix.

All right, thank you for the clarification. And then your comments about the possible 15% value added revenue in 2019 for your aerospace business versus 2016. Again, you are saying it is a 5% CAGR over those three years but it is 15% in the last year. So is it relatively flat then over 2017 and 2018 in comparison to 2016?

No, I just gave two points there. So basically we are saying 2016 to 2017 is going to be relatively flat or we think slightly down in terms of industry demand. But then with the inventory overhang washed out we think that if you compare 2018 to 2016 we are looking at high-single-digits or low-double-digits compared to 2016. And then by the time you get to 2019 it is up to or approximately 15% plus or minus compared to 2016, which is that 5% CAGR over the three years 2016 to 2019.

All right, thank you for the clarification.

And I am showing no further questions in the queue at this time.

Okay, thanks, everyone -- yes, thanks, everyone, for joining us on the call. We look forward to updating you on the fourth quarter and give you more granularity in terms of our 2017 outlook on the February call. Thank you very much.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, you may all disconnect. Everyone have a great day.