Kaiser Aluminum Corp (KALU) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to the Kaiser Aluminum third quarter 2006 earnings results conference call. Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Geoff Mordock. Please go ahead, sir.

Good afternoon, everyone, and welcome to Kaiser Aluminum's third quarter earnings conference call.

If you have not seen a copy of today's earnings release, please visit the Investor Relation's page on our kaiseraluminum.com Web site. We've also posted a PDF version of the slides that accompany this call.

Joining me today are Chairman, President, and Chief Executive Officer, Jack Hockema, Executive Vice President and Chief Financial Officer, Joe Bellino, Vice President and Treasurer, Dan Rinkenberger, and Vice President and Controller, Dan Maddox.

Before we begin, I'd like to remind the audience that the information contained in this presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and involve known and unknown risk and uncertainties. The Company's actual results or actions may differ materially from those projected in forward-looking statements.

For a summary of 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 Form 10-K for the year ended December 31, 2005 and subsequent filings filed with the Securities and Exchange Commission. In this regard, we would like to point out that we review the risk factors included in our Form 10-K and that while we believe that many or most of the risk factors outlined in our Form 10-K were still relevant, we updated our risk factors in our Form 10-Q for the quarter ended September 30, 2006 to reflect our [inaudible] in stock and circumstances.

Non-run rate items to us are items that, while they may reoccur from period-to-period are particularly material to results, impact costs as a result of external market factors, and may not reoccur in feature periods if the same level of underlying performance were to occur. These are certainly part of our business and operating environment but are worthy of being highlighted for the benefit of the users of our financial statements.

Management's intent is to neutralize the fabricated products business units from fluctuations in underlying metal prices. We characterize metal process and LIFO charges as non-run rate items that eventually offset to a great extent over the course of a full year but usually in different time periods.

Further, presentations including such terms as net income or operating income before non-run rate are not intended to be and should not be relied upon in lieu of the comparable caption under Generally Accepted Accounting Principles, or GAAP, to which is it is reconciled. Such presentations are solely intended to provide greater clarity of the impact of certain material items on the GAAP measure and are not intended to imply such items should be excluded.

I would like to turn the meeting over to Jack Hockema who will provide overall commentary on Kaiser Aluminum and its announced results. At the conclusion of the Company's presentation, we'll allow for questions and answers. Jack?

Thanks, Geoff.

As Geoff mentioned, on our Web site we have the slide presentation and that's at kaiseraluminum.com. Before I go into the recent results, I'd like to provide a brief introduction of the Company to those of you who may be joining us for the first time.

As outlined on Slide 5, the new Kaiser Aluminum is a focused, independent aluminum fabricated products company shipping more than 500 million pounds per year through our 11 North American facilities. We've earned a reputation for best-in-class customer satisfaction and our emphasis is to supply highly engineered specifications for the transportation and industrial markets.

On Slide 6 we comment on some headline issues. Earlier today we released our third quarter and year-to-date results. We continued our strong underlying performance in fabricated products.

Our markets have been strong all year, especially in aerospace. During the second half, we're experiencing normal seasonality plus some softening in automotive.

Our expansion of the Trentwood rolling mill, which expands capability and nearly doubles our plate capacity remains on schedule. The first new heat-treat furnace has now achieved full production.

Turning to Slide 7, net sales on a consolidated basis in the quarter were up 22% and the year-to-date sales were up 25% over prior year. Both periods benefited from higher underlying metal prices, as well as fabricated product shipments which were up 5% for the quarter, and 9% for the year-to-date.

On Slide 8 we discuss income results. Strong underlying performance in fabricated products resulted in net income of $14.3 million in the third quarter.

Net income comparisons to pre-emergence periods are not particularly meaningful because of significant changes in post-emergence accounting conventions. As a consequence, we believe that operating income provides for more meaningful comparisons to pre-emergence periods and on the slides that follow, we'll discuss the reporting segments in more detail.

Our core fabricated products business segment is the engine that's driving the Company's improved results. As you can see on Slide 9, both third quarter and year-to-date results benefited from higher volume, stronger conversion prices, and favorable scrap spreads.

Third quarter results improved 13% from what was a very strong prior period, and year-to-date results improved 36% despite the drag from unfavorable energy and non-run rate costs. We should note that operating income in the third quarter does benefit from lower depreciation of approximately $2 million due to the impact of fresh start accounting.

A summary of the primary products business segment is shown on Slide 10, and our 10-Q MD&A comments contain substantial additional details. 2006 results in primary products have been negatively impacted throughout the year by higher power and alumina costs.

The Anglesey power contract expires in late 2009 and alternatives are being reviewed to allow it to operate beyond the expiration of this contract. This review includes identifying the potential costs of a partial or permanent shut down.

Dividends from Anglesey depend upon Anglesey's future cash requirements including potential shut down related costs. Our 10-Q includes further elaboration on all of these topics.

On Slide 11 we break out key components of corporate expenses that are not allocated to the business units. Year-to-date 2006 expenses include approximately $5 million of higher accrued incentive compensation of which $3 million is due to better 2006 performance and approximately $2 million is non-cash expense associated with restricted share grants and emergence.

Additionally, approximately $4 million of the year-to-date charges include costs related to Sarbanes-Oxley and various other transition costs related to emergence. We believe these costs will be significantly reduced by 2008.

Next, I'd like to introduce Joe Bellino who will discuss some of the additional financial details related to post-emergence accounting. Joe?

Thanks, Jack.

Slide 13 discusses our post-emergence balance sheet. As part of our reorganization, the Company has restated its balance sheet to reflect both the implementation of the plan of reorganization and fresh start accounting. On the balance sheet, this affected the value of assets, liabilities, and shareholder's equity.

While we had previously estimated these in our prior second quarter 10-Q, the impact of these items has now been determined and is summarized upon this slide. The result is that today we have a very strong balance sheet, over $200 million in liquidity and virtually no debt.

Turning to Slide 14 we discuss the VEBA for accounting treatment. For accounting purposes, the VEBAs are now considered defined benefit plans with a cap.

This treatment has implications on the balance sheet as summarized upon this slide and detailed in the 10-Q. Keep in mind that the Company's obligation to the VEBAs is an annual variable cash contribution based on an "after-tax cash flow concept formula." We believe that this may not be evident from the depiction in our financial statements.

With that, I'd like to ask Jack for his concluding remarks.

Thanks, Joe.

We've enjoyed a favorable market environment for fabricated products over the past several quarters and that trend continues. We expect aerospace demand to remain strong and our other industrial markets are strong within the context of normal seasonality.

Looking forward into the future for Kaiser, the Company is well positioned with competitive and financial strength. We have a clean balance sheet and significant tax attributes. And we have liquidity to remain strong throughout the business cycle and to fuel our growth.

We have a strong platform for growth and our most significant growth initiative is the $105 million expansion of our Trentwood rolling mill. This expansion enjoys broad and strong customer support and we're proud to have added several additional supply contracts, which we've announced over the past few months.

The first new heat-treat furnace is now running at full production and we are realizing incremental sales from that capacity. The second furnace is expected to reach full production by mid-2007 and the third furnace and stretcher which will complete the expansion, are expected to be fully operational by 2008.

That concludes our formal remarks. We're now ready to begin the Q&A.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Ken Silver from CRT Capital. Please go ahead, sir.

Hi, good afternoon. Thanks for taking the call.

Do you have any update on when you expect the secondary offering to be priced?

I'm sorry, we're in a quiet period and our attorneys have advised us to not comment on the secondary -- on the registration.

Okay. Fair enough.

I haven't seen the 10-Q, but is there information in the 10-Q about the intersegment hedges in the quarter?

Yes, that is all detailed in the MD&A.

Okay.

And then I just had a question about those hedges. Are those, how are those hedges structured? Are they typical third party type hedges?

I mean if these two businesses were ever separated, would those hedge agreements remain in force? Can you talk about that at all?

Yes, I will speak to that. That's a good question and one that we're frequently asked.

The fabricated products business unit and the primary products business unit where hedges are housed are on an arms length basis. So the fabricated products business unit enters into a firm price agreement typically with the primary products business unit, then there's a decision made in the primary products business unit.

That can either be hedged with our internal production because it will come in as a short position for the Company and we have a natural long position with the Anglesey business unit and occasionally we'll also hedge those on the open market. So once the order is in primary products, we then make a decision, do we just want to take this as an internal hedge or do we want to put it on the open market?

In terms of the fabricated products business unit and the corporate results, it's clean, it would be the same basic result if primary products did not exist.

Okay.

And then you mentioned that you were evaluating the Anglesey, the power agreement in Wales. Can you tell us what other potential power sources are out there in that part of the U.K.?

Well, we don't want to go into that, but we're looking at various alternatives to extend the production beyond 2009, although it's not going to be several years beyond 2009, as far as we know at this point. But those are all studies that are underway.

I mean with the price of aluminum as high as it is, could you incur significantly higher power costs, or for the smelter, I should say, incur significantly higher power costs and still be profitable?

Well, those are all parts of the equation that are being considered as we study this whole subject, or at the Anglesey operation studies this subject.

Okay. All right. Thanks a lot.

And we'll take our next question from Lloyd O'Carroll from Davenport and Company. Please go ahead.

Good afternoon, at least on the East Coast. Two questions.

On fresh start accounting, including the markup of inventory, was there any [inaudible] impact on the income statement in the segments from fresh start or was it essentially a balance sheet issue?

Lloyd, this is Joe Bellino, and thank you for your comments.

It was essentially a balance sheet issue. And there's details in the 10-Q of the various different assets that were impacted by the fresh start accounting. There's no income affect.

Okay.

And then corporate expense was higher in Q3. When might that level get down to a normal run rate and we can see that?

Well, I had it in my remarks, but I realize we glossed over that pretty quickly. But in my remarks, we've identified $4 million or so year-to-date of what we categorized as extraordinary costs related to Sarbanes-Oxley and other transition-related items and we expect to reach that run rate to eliminate all of that extraneous costs by 2008.

Okay. Thank you.

And we'll take our next question from Mike Betts from [Echo] Capital. Please go ahead.

Hi, guys.

Hi, Mike.

I had a couple numbers-related questions. One, in the SOx, you just mentioned SOx, I was wondering how much of that was in the third quarter?

Well, Mike, this is Joe Bellino again.

We have been incurring the SOx expenses and our internal controls work really throughout the year. I would say it was a little heavier in the third quarter. It was probably the heaviest period that we incurred was in the third quarter.

Okay. Was there any VEBA expense in the third quarter?

No, there was no VEBA expense. In fact, we have a carryover that was disclosed even in our June 10-Q that we probably won't incur a VEBA expense at all in 2006.

Okay. So the VEBA wouldn't start coming in until 2007 on the normal formula you think?

Yes, and you'll recall a lot of it was driven by the level of capital expenditures and we've estimated in the Q that we were going to spend between 70 and $80 million in Cap Ex this year, so it will mitigate any expense in the funding of the VEBA this year.

Okay --

Mike, just one clarification, to make sure that there's not a misunderstanding. I think Joe was answering your question as if the for post-emergence VEBA.

There actually were pre-emergence VEBA expenses. Each month we made a contribution to the VEBAs until we emerged. The amount that we contributed over the maximum will be recaptured post-emergence before the first dollar is paid post-emergence.

Okay.

But on the income -- and that would go into the corporate expense going forward, is that how you're planning on it? Or are you going to provide a separate line item?

Joe and I are looking at each other.

We plan to put that in a corporate expense item because we don't believe it belongs in fabricated operations.

We haven't made a decision whether we'll isolate it as a separate line item or not, but if it's not it will certainly be up in bright lights so you'll know what it is.

And hey, you guys mentioned that the Trentwood expansion, the first stage started up this quarter well, I mean, I guess the first question is, when did it start up? Was it after the end of the quarter and sort of into the fourth quarter?

It was going through shakedown in the third quarter, really just through basic start-up and now we've reached a full production rate. So in the fourth quarter, we should start to see some incremental sales from that first furnace, which by the way, happens to be the smallest of the three furnaces that we're installing.

Okay. And do you have a sense of how much you guys spent on that shakedown start-up phase with the furnace?

It was -- it's not material.

Okay.

You mentioned in the, and maybe this is wishful thinking, you mentioned in the press release that there was some new contracts. Are these new contracts that weren't previously announced or --

No, we're referring to the contracts that we've announced throughout the third quarter and this quarter.

Okay.

They're all on our Web site in news releases.

Right. I was just hoping you had a couple more.

Let me elaborate on that, because we -- the contracts that we've written consume a very large percentage of the capacity that we have over the next five years or so. So we really don't have a lot more room for additional contracts with the capacity that's installed.

Now, my understanding is that the Trentwood has a lot more rolling capacity than even the new expansion that it's going to use up. Are you guys, do you think there's even -- is there demand for another expansion after this one, potentially?

Obviously we'll monitor the situation and if you just go back to what happened three or four months ago, you recall we had announced a $75 million expansion and the customer interest was so strong that we did another $30 million add-on expansion.

So you're correct in saying that we have a significant amount of available upstream capacity and if customer demand is there, we indeed would do additional expansion. But at this point, we're not forecasting anything like that.

Okay.

And just a final numbers question. On the $50 million borrowing that's outstanding right now, do you have a current interest rate on that?

Yes, we pay LIBOR plus 4.25%.

Which is --

A five-year non-amortizing note.

And how much is that approximately, right now, Joe?

It's approximately 9.25 to 9.50, 9.50, it's an all-in rate with other fees related.

Okay. Thank you very much.

Thank you.

And we'll take our next question from Meryl Witmer from Eagle Capital Partners. Please go ahead.

Just a few follow-ons.

I wonder if there's any chance of you making headway with Toyota and Honda on the auto side of your business?

Yes, that's a good question, Meryl.

In our automotive business we've estimated, because that is such an important issue how much of our portfolio is in the traditional domestic manufacturers and the transplants. The transplants, as you probably know, are producing about 30% of the North American build now and we estimate that our current book, or in 2006, we're in the high teens and we're expecting that with additional bookings that we'll be in the low 20s next year.

Our mix, frankly, is not that far off from what the actual mix of production is in North America and we're continuing our efforts to penetrate the transplants and get back at least to parity there.

Yes, no, that will be terrific. If I went around the aluminum industry and polled executives for ideas about what would be some good uses for your excess rolling capacity, what do you think I'd hear back?

I don't know what they would say, but I don't know how much you've studied our history, but a critical and beneficial strategic decision we made regarding Trentwood around the beginning of this decade was to exit the common alloy products, can, both body and lid products. And that's the reason we have so much excess capacity.

So regardless of what others opinions would be, I can tell you that we have made a significant upgrade in the strategy of Kaiser by focusing on the aerospace and heat-treat, aerospace and general engineering heat-treated products. Our view is that the best use for those assets is to continue to grow in those areas where Trentwood has always been strong and where, frankly, Trentwood lost its way over a couple of decades when it expanded to be all things to all people.

Yes, I think it's terrific what you did. I'm just wondering what, I mean you do have a lot of capacity sitting there. So it would be more aerospace, more other heat-treated --

Exactly.

And what are there areas where there's limited capacity beyond the aerospace area?

Are you talking about our facility?

No, just in limited capacity in terms of -- there's excess aerospace demand, you're helping to fill that. Are there areas other than that where your facility, you could spend another $50 million or $100 million and get a very high return on investment because you have the $2 billion rolling mill already?

Well, obviously, we look at that all the time and it goes back to the same answer that I gave to Michael there, and that is, as those opportunities come and it will be primarily in aerospace and general engineering, at least that's our view today, if there's enough demand in those markets, we will continue to expand there.

Okay. So you see it limited to those areas?

Yes, we really do. Unless some new application comes along for heat-treated type products.

Okay. Go ahead.

That's the finish of the answer. Thank you.

All right. Thank you.

We'll take our next question from Jim Barrett from C.L. King and Associates. Please go ahead.

Good morning, everyone.

The foreign taxes paid, is that in any shape or form, are there any NOLs to shelter those taxes?

Jim, no, there's not. This is Joe Bellino.

What we've disclosed, even in our P&L, the footnotes that we paid $5.6 million during the quarter in foreign taxes, those are taxes related to both our Canadian operations and our Anglesey operations. Those are not sheltered from the NOLs. The income in the U.S. is the amount that is sheltered from the NOLs.

Okay. Thank you very much.

We'll take our next question from Evan Steen from Eos Partners. Please go ahead.

Nice quarter.

My question was the following: You've alluded to a number of times here that you're basically booked out and so I want to get a sense on the leverage that's available to you going forward. Trying to understand how the price of aluminum works its way through these contracts and how that in turn works mathematically, and I'm really speaking more towards the leverage on the gross margin as opposed to the SG&A line, which we can model out pretty good.

I'm trying to get a sense. You're telling us your backlog is strong and everything is pretty much [been done], you really don't have any extra capacity right now for these high-end products and so you're not giving us backlog, but obviously it's strong.

I'm just trying to get a sense mathematically how to look at this and how you can get improvement from where you are today, whether it's investing in new technologies within the plants or running them better or if you're at full capacity, I'm sure they're running pretty well, but there are still things to be improved.

This is Jack Hockema, Evan.

The place where we're redlined and have been redlined now for more than two years is in heat-treat plate products. And heat-treat plate is specifically where we've announced the $105 million investment that will be fully operational in 2008 and the first increment of that capacity expansion has started up here in the fourth quarter and the second aspect will start up in the first half of next year. So we will get significant leverage from the Trentwood expansion over the next four or five quarters as we move forward.

I know on the last conference call somebody asked for sort of guidance in terms of revenues or volume or something and you guys were very reluctant to give out that info. Is there any other way you can give us some sort of sense?

I think somebody on the last conference call said, well, if you invest $105 million, obviously, I can say, I can figure out some sort of IRR that you're expecting off of that over a certain period of time and do it that way, but just more simplistically, can you give us any more feel of actually when you say, oh, well, you're going to see this because we've just opened up this furnace and we have another one and we have another one, that what that actually means in some sort of quantitative fashion?

No, we've -- we're continuing to adhere to the opinion that we're not going to forecast what those benefits will be.

Okay. And then just one second question along the same lines.

What can you do in your mix, as you said the auto is slightly weaker, and I know you make more gross, I forget because I haven't read this Q, but the gross margin per pound is higher in the aerospace, I would assume than the auto.

What can you do with your own capacity in terms of changing the mix to improve the gross margin per pound going forward? What opportunities do you have?

Well, the biggest opportunity to improve margin per pound is exactly as you described. So it would be mix related. I can tell you, however, that margin per pound is not anywhere on our list of objectives.

Our objective is to get EVA, economic value added, and look at the assets that we're employing and there are very low margin per pound items that are very attractive pieces of business for us. So it's not driven by what's the margin per pound, rather it's driven by what pieces of equipment are we utilizing and then we look for a profit contribution per hour on key pieces of equipment.

So going through a heat-treat furnace at Trentwood we look for high contributions per hour and get high contributions per pound. Automotive is both extrusions and forgings but, for example, if automotive extrusions are soft, we would be looking for other extrusion products that give us a comparable or higher contribution per press hour.

And again, it's irrelevant. Some item that makes $0.10 per pound may be more attractive to us than one that makes $0.50 a pound if the one that makes $0.10 per pound requires fewer than 20% of the press hours required to produce it, if that makes sense to you.

It does.

And then the last question is on energy. Could you just give us a sense, I don't know if you're hedged at all or for how long, what the impact of oil falling here and nat gas does for you?

Sure. It is in the 10-Q, when you get a chance to go into it. I forget the exact numbers, but I think we were somewhere between 70 and 80% hedged on natural gas in the fourth quarter and I think we're somewhere up around 20% in the first quarter, don't hold me to the numbers, but they're in the Q.

And then we do have some hedging actually beyond the first quarter of next year, actually out into the first quarter of 2008. So, yes, we do have some hedging. And the answer is that as these prices have come down, while we've not seen a favorable quarter-to-quarter comparison, this third quarter to prior year was almost flat.

We expect as we move forward, we'll start to see some favorable comparisons to what happened when the energy prices spiked after Katrina. That was really fourth quarter last year. I haven't looked at the numbers but I think can I say with confidence that our fourth quarter this year will probably have favorable energy versus the prior year.

Okay. Thank you very much.

We'll take our next question from Greg [Koulis] from Metropolitan Capital. Please go ahead.

I had just a couple of specific kind of administrative questions and then one sort of longer one.

Wanted to know are the VEBA payments, do those extend sort of ad infinitum or is there a limit to how long you have to make those payments?

And the sort of other administrative question is, in the slides it said that the full capacity expansion at Trentwood along with the related stretchers would come on '08, '09. But in the press release today it said by early '08 all capacity expansion initiatives should be in place and up and running and just wanted to check on those two things.

Sure. On the VEBA, there are two aspects of the VEBA. One VEBA agreement is for the salaried retirees and that agreement has no end so it goes to infinity, theoretically.

The agreement with the unions, the union VEBA, that agreement expires, I believe, in 2011, 2011 or 2012, sometime in that time frame, however, that is a negotiable issue. So while the contractual commitment expires at that point in time, it likely will be involved in collective bargaining.

You're saying it's likely would extend beyond 2011, or would likely terminate prior to the --

Well, I'm saying it's subject to collective bargaining and our position can be that as far as we're concerned, it's done, but I would expect that our friends on the steelworker's side would be looking at what could be $20 million per year of payments and they would consider any change from that to be a concession that they were making, and that's how the bargaining would be begin.

Understood. How much of the $20 million, if you were divide it between the salaried employees and the union agreements of the VEBA payments? Just trying to sort of disassociate the full $20 million.

I'm sorry, Dan?

It's approximately 15 for the salaried and 85, I believe, for the hourly.

So that was an 85/15 split if you couldn't hear Dan. 85% is union and roughly 15% is salaried people.

Oh, okay. So the 85% in theory would terminate in 2011.

In theory, but I wouldn't put a lot of confidence that it's going to evaporate.

Understood. And then in terms of the capacity expansion in Trentwood, the timing?

The timing, and I don't know that there's a disconnect, but --

I think we said in the Q, Greg, we said something in the Q, we said something in the press release, we said in the press release that the production would then be available in early 2008, which means the construction project would be fully completed and capped out, and on our slide on that Jack talked about in his closing comments, we said the full impact from the sales standpoint would be realized in the 2008, 2009 period.

On a full sort of run rate basis.

Yes.

And then the final question with respect to Trentwood and, again, it's sort of a general question, but just help me understand.

When a lot of the, as I understood the way things work and I'm simplifying here, but that Boeing and to a lesser degree Airbus and people like that come to you and say, look, there's a big shortage in heat-treated plate, I'll take everything you can make because we have lots of planes to make, and it's in their interest to sign longer term agreements as well as for you, too.

How much of the excess capacity will you have such that if the supply-demand imbalance only gets more favorable from your perspective, will you be able to exploit perhaps higher prices or will most everything of your capacity will be locked up in long-term agreements and there won't be a lot of spot market price increase enjoyment that you guys will have?

The answer is your latter comment and that is, if the market remains very, very strong through the next five years there will be little capacity available for spot business.

Okay. Okay. Great. All right. Thanks, guys.

Thank you.

And we'll take our next question from Aaron Rosen from Citigroup. Please go ahead, sir.

Hey, guys.

Just wondering, given that the Company has no net debt right now and I think we're all expecting some pretty strong cash flow going forward, just wondering if you've given any thought to if there's an opportunity to better capitalize the Company going forward?

Yes, we discuss that all along. Just let me say that we look at the priorities here, number one is growth and Trentwood is an aspect of that, but we believe we also have strong organic growth opportunities in our extrusion and forging business and we believe we have strong acquisition opportunities as well.

So that's our first focus is to find good growth investments for this company that really has kind of been under a shell here without the financial latitude over the past couple of decades to do much. So that's the first priority, but then beyond that, we'll look at other ways of getting the returns back to the shareholders, and we'll look at ways to get to a more efficient capital structure.

But all of that is going to be in the context, hopefully, of capitalizing on what we believe is an excellent growth platform here.

Are you adverse to a more moderate degree of leverage? What are your thoughts on appropriate leverage for the business?

I don't know that we've stated that publicly, but I will comment that the current position is an inefficient capital structure and we believe to have a more efficient capital structure, there should be more debt on the balance sheet.

I'm not going to say what that number is at this point, but we've got our general guidelines that we look at in-house but, again, that's going to be a function first of us finding and funding what we believe will be excellent growth opportunities and, hopefully, that will give us good opportunities to put some debt on the balance sheet and improve our capital structure, if that gets to your point.

Okay. Great. Congrats on the quarter. Thanks. Okay. Thank you.

[OPERATOR INSTRUCTIONS] We'll take our next question from Eric Ribner from Northstar Capital Funds. Please go ahead.

Can you talk about the increase in pounds produced at the new capacity in Trentwood is going to allow you?

I think we had a prior question asking basically the same thing and we've not disclosed that publicly and we continue to choose not to disclose that.

Okay. And in this quarter, it looks like your fabricated products shipped was down sequentially?

Yes.

Just -- was there something that occurred in the quarter or is that --

No, I'm glad you asked that question. It gives me a chance to expound.

I talked about seasonality a couple of times in the prepared remarks and as people get to know our business, they'll get to understand this. There's no such thing as a normal year, but this year is about as, quote, normal as it gets.

Our rule of thumb is that in a normal year, if demand is -- if the demand drivers are virtually flat through the year, we'd be look at around 55% of our shipments in the first half and 45 in the second half. And internally, we've looked -- if we eliminated our plate shipments from the equation, because we're sold out there, and just look at everything else, and if the fourth quarter were the same as this third quarter, it would result in a 54/46 split in terms of shipments.

So the answer is even with some extraordinary softness in automotive, the shipments, if you eliminate plate, the shipments decline is almost precisely what our rule of thumb of 55/45 year would say. It's fundamental seasonality.

All right.

And let me go beyond that. The reason for the seasonality in the third quarter, the July/August time frame, we typically have a number of customer plant shutdowns, especially in automotive, but a lot of other market segments.

And then when we get into the fourth quarter, we have all of the holiday shutdowns, plus we generally, especially with the service centers, the distributors get into destocking because they're trying to trim their inventories going into their year-end balance sheet. So typically, the fourth is a little bit weaker than the third, but the combination of the two are typically roughly 10% below the first half.

Do you think that will happen even with the new capacity from the --

Well, no, I excluded plate from my discussion there.

Okay.

So if you exclude plate, which where we're selling every pound that we can produce, a traditional year is a 55/45 and that's pretty much what we saw in the third quarter.

Have you ever disclosed how much plate you are producing?

No, we do not.

Thank you.

We'll take a follow-up question from Meryl Witmer from Eagle Capital Partners. Please go ahead.

Hi. Thanks.

Your comments on the debt are interesting because I guess what I hear about the interest rate you're paying on the note, it's like a ahh, a nauseating-type number --

Is that the question? Hello? Did we lose Meryl?

Yes, we did. We'll take Mike --

Well, wait. I think I know where Meryl was headed, the question is, why do you have the debt?

The interest that we're paying, remember, we also have cash investment, so the net is a relatively small number, I think it's 3 or 4%. So the net cost of that debt is 3 or 4%. And when we put that debt on, it was looking forward to a major expansion of Trentwood and looking at our liquidity needs and part of our consideration is the business cycles and what kind of liquidity do we need to have a strong position, if in fact we hit a step in the business cycle.

So that debt is not costing us that much. We believe it's prudent debt to have the right kind of liquidity in preparation for the business cycle.

That all being said, as we get past emergence here and move forward, we'll clearly, and as we start to further define what our growth opportunities are, we'll be looking at the most efficient way to structure our balance sheet here and our debt. I hope that answered Meryl's question.

Meryl, if you have another question, please press star one. And your line is open, Ms. Witmer.

I missed part of that part of your answer because they came in again as you were speaking. But I guess -- and I heard you, you view yourself as the net cost is, whatever, 4% or something. But if you didn't have the debt, it would save you 9%. So it's not a, well, I guess --

No, no.

You wouldn't have the cash, but the fact is your cash is going to build up over time. And I mean do you look at your interest cost as a 9% after-tax cost?

Is that how it actually in the tax world works, or are you getting an offset? Because you have the NOL, so I mean 9% is an awfully high after-tax cost.

But Meryl, Jack mentioned earlier that we have in excess of $50 million of cash on our books, so we look at the net interest expense net of interest income that [inaudible] where we have it parked currently try to maximize those yields and short-term investments. So the net spread is about 3.5 to 4% and on an after-tax basis, well we compute it because we're going to use the NOL, so you can almost say it's on a 3 to 4% pretax and after-tax basis, but we still feel that's a very attractive number.

Jack was talking about earlier that that long-term piece fits well with our, this was pre-negotiated before emergence, although we put it into place in August, but five-year term money with non-amortizing seemed to fit pretty well with our blending in with our revolver, which is currently untapped other than us using some lines of, letters of credit against the $200 million revolver.

Let me ask you this, if you generate $200 million of cash then do you want to borrow $200 million and have that negative spread? Or is it just for this amount you feel that you need?

I'll answer it this way, Meryl, we have financial guidelines in the Company and we base it on minimum liquidity and maximum liquidity. There's a range of liquidity that we believe is right for this company given the business cycle environment that we work through and the growth programs that we're funding as we go forward.

And so we want to keep at a certain minimum level of liquidity when markets are as strong as they are now because at some point in the future, there will be a downturn. We hope it's several years out, but we can't count on that.

So first we want to make sure that we have our safety net for the business cycle, but then the second aspect of it is that we belong, we believe that the money belongs to the investors not to the company, not to the managers and we have a maximum level of liquidity and we're not going to define on this call what that is, but we've agreed with our board on what that is and when our liquidity hits that threshold, we'll sit down with the board and say, we have more liquidity than we need here, where do we go? And if we don't have growth programs to use up that excess cash, we'll look at other ways of delivering that cash and one could be to take out debt and it could get into dividend policies or share buybacks or any variety of things.

But in terms of our discipline in running the Company, we have a band, a min/max liquidity that we look to hold that trigger actions in either direction.

Okay. No, that makes sense.

Now with Toyota, I'm sorry, with the transplant business where you talk about going from the high teens to the low 20s, is that because you're garnering more transplant business or that because the big three are falling off a cliff?

No, that's because we're capturing more business.

Okay. Very good. Thank you.

We'll take our last question from Mike Betts from Eagle Capital. Please go ahead, sir.

Just a follow-up on what Meryl was just asking about.

I'm wondering how business has been going out of the London, Ontario, plant whether you could discuss that for a couple seconds?

Sure, Mike, your question was a little bit weak, I'll ask -- or I'll repeat it for the rest of the group if they didn't hear, but I believe your question was, how business is going with our London, Ontario plant.

You may have picked up, I believe there were some press releases out there where there may have been a reduction in force there. London is almost exclusively an automotive plant and so their business did soften in the third quarter as a consequence of some of the things going on that are well reported in the automotive industry here.

And could you quantify any impact on the quarter's results from those--

No, it's all baked in. I'll just go back to the answer, I believe it was Aaron's question about why were shipments down in the third quarter. When we factor in in total, if I strip out plate and, again, plate is sold out. So we sell every pound of plate that we can produce.

We strip it out and if we consider normal seasonality as well as a little bit more depressed seasonality in automotive here in the third quarter, our shipments, other than plate, showed what we would say is a typical seasonal pattern.

So automotive was a little bit weaker seasonally. Some of the other segments were a little bit stronger seasonally, and when you put the whole basket together, excluding plate, it was about as prototypical a third quarter as we could have.

How many employees were reduced at the London --

I don't know that number, Mike. We're looking around the table here. Yes.

Was it a large number?

No, it was less than 50. I don't know what you think a large number is, but for the London plant, that was a large number.

Okay. Thank you very much.

And that will conclude our question-and-answer session for today. I would right now like to turn it back over to Mr. Geoff Mordock for any additional or closing remarks.

No problem. Thank you. Thank you, everybody for joining us today. A replay of this conference call will be available on the Investor Relations page at the kaiseraluminum.com Web site. Have a good afternoon.

Once again, ladies and gentlemen, this will conclude today's conference. We thank you for your participation. You may now disconnect.