Kaiser Aluminum Corp (KALU) 2007 Q2 法說會逐字稿

Good day and welcome, everyone, to the Kaiser Aluminum second quarter 2007 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.

Thank you. Good morning, everyone, and welcome to Kaiser Aluminum's second quarter 2007 earnings conference call.

If you have not seen a copy of today's earnings release, please visit the Investor Relations 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, Chief Accounting Officer, Lynton Rowsell, and Vice President and Treasurer, Dan Rinkenberger.

Before we begin, I'd like to remind the audience that the information contained in this presentation include statements based on management's current expectations, estimates, and projections that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements include statements regarding the Company's anticipated financial and operating performance, relate to future events and expectations, and involve known and unknown risks and uncertainties.

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 for the quarter ended June 30, 2007 and reports filed with the Securities and Exchange Commission, including the Company's Form 10-Q for the quarter ended June 30th, 2007 and Form 10-K for the year ended December 31, 2006.

All information in this presentation is as of the date of the presentation. The Company undertakes no duty to update any forward-looking statement to conform a statement to actual results or changes in the Company's expectations.

Non-run rate items to us are items that while they may recur from period to period are, one, particularly material to results, two, impact costs as a result of external market factors, and three, may not recur in future periods at 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 product segment from fluctuations in underlying metal prices. We characterize metal profits and LIFO charges as non-run rate items that eventually offset to a great extent over the course of full-year.

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 on in lieu of the comparable caption under Generally Accepted Accounting Principles, or GAAP, to which 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 now like to turn the meeting over to Jack Hockema, who will provide overall commentary on Kaiser Aluminum. At the conclusion of the Company's presentation, we'll allow for questions and answers. Jack?

Thanks, Jeff.

As Jeff mentioned, you may follow our remarks by viewing the slide presentation on our Web site at kaiseraluminum.com. My remarks begin with an overview of today's discussion on Slide 5.

Our organic growth program has strong momentum. The Trentwood expansion is on schedule and is making a significant contribution to improved results. And we recently announced two important initiatives that increase our organic growth program to $230 million.

Our financial condition is strong and improving and we have significant financial capacity to fund additional growth initiatives. Strong year-to-date financial results are a step change improvement and the Trentwood expansion is the primary driver for the improved results.

Turning to Slide 6, the size of our organic growth program has more than doubled to $230 million since our last earnings call. The $139 million Trentwood expansion remains on schedule. The first phase became fully operational early this year and the year-to-date results reflect significant benefits from this investment.

The second phase is on schedule to be fully operational in early 2008 and the recently announced third phase is scheduled to be fully operational late next year.

Slide 7 addresses the $91 million investment program announced yesterday with the focus on our rod, bar, and tube products. We enjoy a very strong market position in these products and the investment program is designed to deliver significant efficiencies and to provide a platform for future growth.

The investments include a new Midwestern extrusion facility plus upgrades to our Los Angeles, Chandler, and Bellwood operations. We expect the program to be fully implemented by the end of 2009 and to have an ultimate impact equivalent to an investment at approximately 3.5 times EBITDA.

Turning to Page 8, we reported consolidated operating income of $95 million for the first half as both business segments reported significantly improved results. Record operating income from our fabricated products business segment was up 46% from prior year driven by benefits from the Trentwood expansion. The record fabricated products result was achieved despite soft ground transportation and general industrial demand.

Joe will now provide additional color regarding our financial performance. Joe?

Thanks, Jack.

The financial presentation begins on Slide 10. We're pleased to have reported that our operating income for the first half of 2007 was $95 million and that for the same period we generated $49 million in cash flow from operations, which funded our capital spending of $28 million.

During the quarter we continued to strengthen our balance sheet. In addition, we announced the initiation of a quarterly dividend which is payable on August 17th.

Turning to Slide 11, our net sales on a consolidated basis were up 13% to $777 million year-to-date. We have continued to benefit from a richer product mix and value-added pricing as well as from higher underlying metal prices.

The total fabricated product shipments were up 2% year-to-date. Shipments of heat treat plate products enabled by Trentwood's capacity expansion were up significantly compared to the first half of 2006 and this contributed to a very rich product mix.

On Slide 12, we discuss net income results. Our strong performance in both fabricated products and primary products resulted in net income of $52 million for the first half of 2007. Net income included an effective tax rate of 46%.

When taking into account the use of tax attributes in the income statement, the cash tax rate would have been approximately 15%. We expect this rate to be in the 15% range over the balance of this year. Our 10-Q Note 7 provides more details on the tax aspects of this.

Turning to Slide 13, where we discuss operating income, which we believe that operating income is a more meaningful metric for making period-to-period comparisons. Operating income for the first half of 2007 of $95 million includes $14 million in non-run rate items. Operating income before non-run rate items improved 56% year-over-year from strong performance in fab products and primary products.

On the slides that follow, we'll discuss the financial performance of each of the three segments. Viewing our fabricated products business on Slide 14, our reported segment operating income was $90 million in the first half of 2007 compared to $61 million in the same period last year. Year-to-date results have benefited from an $8 million improvement from non-run rate items.

If we look at the operating income before non-run rate items, our underlying fab operating income increased 30% to $87 million, up $20 million from the prior year. The improvement in operating income was driven by heat treat plate and other aerospace and defense products. We realized a favorable impact of $20 million from the record heat treat plate shipments and $8 million from rich value-added pricing.

Partially offsetting these results was an unfavorable impact in excess of $5 million from lower volumes in ground transportation and general industrial applications. The first half of 2007 also benefited by approximately $5 million in lowered depreciation expenses.

On our primary product segment shown on Slide 15 was stronger in the first half of 2007, is operating income before non-run rate items was $19 million versus $14 million a year ago. The drivers for this improved performance were higher prices for primary aluminum, improved hedging results, and favorable alumina pricing.

On a reported basis, primary products generated operating income of $18 million for the first half and that compares to $12 million in the first half of 2006. Non-run rate items, primarily unrealized market-to-market adjustments for metals and currency derivatives, were $9 million unfavorable in the first half of this year compared to 2006.

Along with the improved results in primary products, Anglesey's board recently declared a divided to its shareholders. As a result, Kaiser will receive approximately $4.5 million as a cash dividend in the current quarter.

On Slide 16, we show the corporate expenses which are not allocated to the business segments. Excluding non-cash equity compensation, corporate and other expenses were on par with the first half of 2006.

Next, I would like to ask Jack to provide some concluding remarks.

Thanks, Joe.

Slide 18 addresses the near-term outlook beginning with a discussion of the market environment. Demand for aerospace plate is robust, but the ramp up is slower than anticipated. Strong demand for armor plate should cushion the impact of softer demand for general engineering plate.

We expect that the ground transportation and general industrial markets will experience weakness in the second half similar to the first half and destocking by service centers may continue. Translating this environment to Kaiser's situation, we expect that our rich heat treat plate price and mix and strong volume will continue in the second half at levels similar to the first half.

The soft market in other products is exerting some competitive pressure on prices although the impact has been relatively isolated. Normal seasonality is expected as customers will have fewer work days due to vacation shutdowns and holidays.

Our planned major maintenance costs are expected to be higher in the second half, but may be offset with improved cost performance as our flexing of our cost catches up to the lower volumes in the affected plants. And lastly, we expect that primary products second half performance will be similar to the very strong first half.

Turning to Slide 19 and a summary of today's report. We recorded excellent financial results for the first half, business conditions in the second half are expected to be similar except for normal seasonality and the potential for softening prices for certain products.

The organic growth program has momentum and is delivering results. The $139 million Trentwood expansion is on schedule, the $91 million rod, bar, and tube initiative is expected to deliver attractive financial return while enhancing our very strong market position for these products. Our financial condition is strong and improving, and we have financial capacity to fund additional growth initiatives beyond the $230 million organic growth program.

We will now accept questions.

Thank you. (OPERATOR INSTRUCTIONS) Our first question will come from Timna Tanners with UBS.

Yes, hi, good afternoon, gentlemen.

Morning, Timna.

Hi. Wanted to ask a couple of questions.

I guess in some ways this quarter was a lot stronger than I think we might have been led to believe after the conference call from the first quarter with regard to the outlook and the sentiment at that time. Can you tell us what might have changed from your, the time that you gave us the outlook for the second quarter?

I don't think -- this is Jack speaking. I'm not aware that anything has changed. Our story line has remained very, very consistent going into the first quarter and reporting the first quarter results, I mean, going clear back to when we had the road show in January.

The only thing that really had changed in the first quarter is that there was some softening in the general industrial and ground transportation markets, which we talked about and that basically continued.

Okay.

And so the margin expansion was, what, the fact that aluminum costs went down or input costs into your fab business? Or how do you explain the margin expansion into the second quarter?

Are you talking the margin expansion in fab products?

Overall and in fab products.

Well, if you look at it overall, the big -- let me just talk about the segments. Corporate was relatively constant from first quarter to second quarter.

If you look at fab products, the non-run rate, which, again, we point to is the most important statistic, especially if you look at it in the short-term, fab products was about $3 million better quarter-over-quarter and most of that was cost improvement, second quarter versus the first quarter. And then in primary products, it was 3 or $4 million better than the first quarter so primary products, as well, contributed if you're looking at margin for the Company as a whole.

Got it. Okay.

And then for the $4.5 million contribution, where will that be reported in just the primary aluminum business operating income?

You're speaking to the dividend from Anglesey?

Exactly.

Joe or Lynton?

It has a cash effect, Timna. It's really the way we account for equity accounting on our balance sheet. It'll reduce our investment in Anglesey on the balance sheet as an asset by $4.5 million bit it'll show up in the cash flows as cash received.

Okay. So not showing up on the income statement?

Correct.

Got it. Okay. And I don't want to hog the call.

So I guess I just wanted to ask a little bit more about the Cap Ex that you announced. How do we understand this? Still you're going to have strong cash flows and you mentioned in your opening remarks that you have further ability to do acquisitions and perhaps other growth plans.

Is this a decision on your part maybe that building is better than buying or do you still see opportunities for further smaller acquisitions as you've highlighted in the past?

That's a good question, Timna. Our opinion is building is always better than buying, or almost always better than buying a good organic growth program. And in this case, this is rather -- the extrusion investment, as we've said on prior calls, is more directed at value stream efficiencies than it is top line, so characterizing it as building, most of this is coming from improved -- most of the return comes from improved efficiencies rather than any top line growth.

And as I indicated in the comments, we expect this to have an attractive return estimated or equivalent to an investment at 3.5 times EBITDA. So it's a very attractive investment program.

But at this point, while we'll continue to look hard for good organic growth opportunities, we're not going to have anything that we foresee at this point order of magnitude what we've done in heat treat plate and now with this rod, bar, and tube initiative. And we're now beginning to turn our focus and attention to look for good opportunities for acquisitions.

Got it. Okay. Go ahead.

Yes, let me come back to one other one, Timna.

Someone reminded me that in our first quarter comments I said we really hadn't changed much. One thing that we had indicated is that we had a very rich heat treat plate product mix that we didn't think would continue.

Right.

And that did continue in the second quarter. And in my comments here I've now extended that to the fact that we expect that this rich mix is going to continue at least for the next several months. So it's robust, as Joe indicated, it contributed our pricing versus last year on heat treat plate was approximately $8 million better than prior year.

So it's a very, very rich mix because last year was a rich price mix, as well. Our marketing people have done a good job of positioning us with changing market conditions here and we've been able to continue this rich product mix.

Okay. That helps explain things. And then last question.

With regard to what we were just discussing with the extrusions expansion or at least the Cap Ex enhancement there, what does that say about your underlying belief in that business? Does it say you plan to take market share?

Does it say that you think there's opportunity to reduce your existing cost? It's been pretty depressed for a while. What does it say about maybe the opportunity there for that to recover?

That's a good question, too. Let me speak a little bit to what this investment does.

As I said in terms of the return, the primary driver is the efficiencies that we expect to get but this investment in rod, bar, and tube is broader than that. We have a very, very strong market position and have had for many, many years a strong market position in these products. And we have what we call select rod and bar products, which have been demonstrated in the marketplace to deliver superior machining performance for our customers.

So we have a strong market position and we have technology to produce a product that is superior, that we believe is superior, in the marketplace. This investment, we believe, will position us as a or the low-cost producer and there are some factors involved that create what we think will be a strong competitive position.

One is that these products, especially the rod and bar products, are very low value-added products and so the logistics costs are a very important piece of the equation. The preponderance of this market is in the midwest, the upper midwest in the Chicago-Detroit corridor, and so locating this plant in the midwest will give us a freight advantage compared to most of our competitors.

We also will have a world-class billet casting operation there that will be capable of melting scrap and producing the equivalent of prime billet in terms of quality and it will also be capable of utilizing very low-cost scrap as the raw material. So we believe that we'll also enjoy some very, very good raw material costs feeding that plant.

And then thirdly, it will be designed with our select processing and our Kaiser production system technologies to be a very, very lean operation from receiving raw materials as well as processing it and delivering it to the customer.

And then last but not least, the third component of this is the plant will have capacity that is not planned to be utilized in the return on investment that I spoke to. So there's open capacity there that can be utilized for market share improvements or new extrusion customer programs that we would book beyond what we've planned for this facility.

Okay. (Inaudible) assumptions aren't for, like, a major recovery necessarily in the market, it's more an opportunity status quo to improve your cost structure and competitiveness?

Let me just say in rod, in the rod and bar market, the true end market here is down just a few percent from last year, whereas, the mill shipments into the market for rod and bar are down in the teens, and the difference between the two is destocking. So as the market stabilizes from a destocking standpoint, we'll see demand to begin to improve.

And our long-term forecast is for this market to be about a 2% annual growth market. It basically grows with the industrial economy, maybe a little bit slower than the industrial economy. So no, we're not counting on a huge rebound other than the service enters eventually reaching an equilibrium in terms of their inventories and real demand returning to normal levels.

Okay. Thanks so much.

Okay. And our next question will come from Matt Teplitz with Quaker Capital Management.

Afternoon or good morning to you gentlemen. Just a couple other questions.

On the tax rate at -- the cash tax rate of 15% this year, given your mix, I guess, primarily between U.S. and Canadian plants, is there any reason that should change dramatically over time or given the, I guess, the added capacity at Trentwood?

Matt, we, as I mentioned in the notes earlier in my -- Note 7 in our quarterly breaks out the taxes. The year-to-date the taxes we accrued for international operations, which is both in our primary product segment at Anglesey and our Canadian operations, or in other words, all non-U.S. operations, it's running at the rate of about $5.5 million of taxes we're booking per quarter or $11 million year-to-date.

To the extent that we are able to get through an expansion of our U.S. operating profits, if those go larger than that effective tax rate would shrink and vice versa. But that's the way we model it internally. We estimate approximately $5.5 million of taxes a quarter that we'll pay and then the rest is a fallout from the provisional tax rate we do on U.S. operations, which is about 38%.

But on a cash basis, presumably is going to be de minimus for quite a while in the U.S.?

Yes.

Okay. And in terms of Anglesey, there's no change that I'm aware of is there, in terms of the expectation of the shutdown?

No, we have nothing new to report there. Obviously, we continue to work hard to find alternatives and opportunities to extend the life of that facility but we have nothing positive to report at this point.

Just curious, has the British government ever explained what they're going to do to provide power to everyone else besides you guys when this plant is closed?

No, we have no knowledge of that.

That's their problem, I guess.

Yes.

Okay. One other question.

So just so I'm understanding the announcement yesterday, the $91 million capital expenditure plan, which, again, I guess if I understood what you said, would return, is costing 3.5 times the return (inaudible). So presumably that means 25, $26 million of annual EBITDA should be generated by this investment once it's up and running, is that correct?

Yes. Yes, that would be the arithmetic.

So it wasn't all a waste of time. Okay.

And then one other question then because this is what we've all wondered about. You've never been as explicit about what the return on the Trentwood investment might be. This would be a good opportunity to provide a similar metric if you wanted to.

Yes, we'll decline that opportunity but I will say that if you go back to Joe's remarks, we put some more detail and granularity in the analysis of the fabricated products operations. And we attributed $20 million of improvement year-over-year to volume that came from the Trentwood expansion.

Right.

And this first leg of the expansion we've said is roughly a 60% expansion compared to what our baseline capacity was in 2005.

And have you sized what the second leg represents relative to that?

Yes. Actually on the slide, which slide was it where I discussed that? Slide 6 or 7.

It's on Slide 6.

Yes. If you look at Slide 6 in the presentation, it shows that this first phase if you measure the size of the bars, we don't have the numbers on there, but the first phase is roughly a 60% increase from the baseline capacity and we used 2005 as the baseline. And then, the second phase that comes on early next year is another 40% taking the total capacity roughly double what it was at the baseline.

And then this last, the third increment that we recently announced that comes on late in 2009 is equivalent to roughly another 20%. So the ultimate capacity at the end of next year will be approximately 2.2 times what our baseline was in 2005.

Okay. And Phase 3 is the 30-odd million debottlenecking?

Correct. That's correct.

Okay. One last question I think and then I'll turn it over.

You commented, I guess, pleasantly surprised by the rich mix continuing this quarter and the expectation, I guess, that it will continue at least another quarter. Why do you expect that to diminish by the end of the year or into '08 or do you?

Well, I'm not going to speak to '08. Let me just go back and repeat what I said, and that is that this market has been sold out basically for heat treat plates since early 2005. And when we look at prices historically beginning in 2005, the pricing that we've experienced is a step change compared to history.

So it's a significant improvement in prices and it improved more in 2006 to what we felt would probably be peak prices, but we've been surprised again, pleasantly surprised, with the $8 million improvement first half of this year versus last year. And now we're surprised again that the market dynamics, at least as they impact Kaiser Aluminum, are such that we're hopeful that this kind of a rich pricing is going to continue through the second half.

Is it sustainable for years and years and years? Only time will tell, but our perspective is these are very rich prices and we're not speculating that we're going to see these rich prices hold up for the long-term. But again, we've got more legs now than we expected and perhaps we'll be pleasantly surprised. We're not going to forecast that.

Okay.

And lastly, I guess on that subject, then. Demand obviously you can't necessarily predict but you have a pretty good idea what people's backlogs look like. In terms of supply, where is competitive plate coming on that you're aware of?

Well, several of our competitors announced modest capacity increases, and I say modest just in comparison to ours where we're more than doubling our plate capacity. So several competitors have added plate capacity. Our analysis of the situation and analysis of some of the big customers on the other side all indicate that the capacity that's coming on should be in pretty good equilibrium with what the demand will be.

I said in my comments, my outlook comments, that aerospace plate demand is robust, but the ramp up is not quite as brisk as what was anticipated, so the market is not quite as tight right now as we anticipated. But again, over the long-term, we think that there's going to be good balance in supply and demand. We're not going to see a big overhang of capacity with the new capacity that the supplier mix is bringing on.

Okay. Well, thank you very much.

Uh-huh.

(OPERATOR INSTRUCTIONS) We'll go now to Matthew Lerner with American Metal Market. Please go ahead.

Good morning, gentlemen. Actually my questions have all been answered. Thank you very much.

Okay. Thank you, Matthew.

And gentlemen, we do have a question from Lee Lignos with Lakeway Capital Management.

Yes, hi, guys, it's actually Rob Lietzow. How are you doing?

Hi, Rob.

So I guess a couple questions.

One on that -- if you look at the $20 million from volume and $8 million from price, is that all spot market related or is some of that just related to the fact that you have the more aerospace coming on and it's at potentially higher prices?

I would say a portion of it is spot although not a lot of our aerospace business spot business. From a general engineering standpoint, clearly, it's been a favorable impact from spot.

And there's also an impact, especially on some of our smaller aerospace contracts as they roll over, most of those are a few years, one to three years in length and they've obviously have rolled over at some favorable prices. So it's really a blend of all those things.

And it's also a blend of the mix of customers and mix of contracts that are involved. So there are just a lot of things going on in there, Rob.

No, I hear you. But I guess it's not just all a spot market phenomena, I guess, is what I'm getting at. So that if we look at it and we say, you know, 20 plus some portion of the aid is related to kind of the fact that you're bringing on higher price point products from this capacity expansion. Maybe you don't want to opine on that, but that's kind of the conclusion I'm drawing, I guess.

Yes, I understand.

I don't want to try to pin you down on it, it's not the point of the question.

I guess if we look at the $26 million in potential profit from the 91 that you're going to be spending, do we -- can we conclude that that 28% rate of return is kind of within the ballpark or minimum expectation that we should think you guys are thinking about when you spend money?

I wouldn't necessarily say that. I think an acquisition at 3.5 times EBITDA, if that were our hurdle, we wouldn't do any acquisitions for sure.

No, I hear you on that.

I mean, obviously, 3.5 is fantastic. But I guess in other words maybe not from an acquisition because, obviously, there's strategic value you get from that and there's potential cost savings and so maybe at the end of the day you might be getting that similar hurdle.

To your point, Rob, I understand where you're going. This is an attractive return from an organic growth investment of this magnitude. I mean, $91 million is equivalent to and larger even than some acquisitions that we might look at.

Yes, no, that's a big number.

So that's a big investment and to get that kind of return on an investment that large is very, very attractive. Would we have done this investment if the return gave a less than 3.5 times or if it were 5 times or something like that in a strategic product line like this where we have a very strong market position where we believe we have the best products in the marketplace and we believe that we have by far the broadest product offering to deliver to the customers from a general engineering standpoint, we would have done this investment with a significantly lower return because it is so strategic and is a very large investment with a nice return.

Right. I hear you on that.

I guess I was more trying to triangulate back to the Trentwood. I guess if I look at, you know, call it $25 million for half a year of 60%, you can see that that return on 100, whatever it's going to be, I mean, depending on how you want to look at it, $100 million is off the Richter scale. I guess is the other way to look at that.

Okay. Yes, those are your words, Rob.

No, I understand, but I mean if you annualize that it's like $50 million, you gross it up. You get what I'm getting at. Even if you haircut the numbers quite a bit, you can still see it's (inaudible).

Yes, I think all of our conversation has been that the Trentwood expansion was based on attractive returns.

Yes, no doubt. And it's showing up and, obviously, this quarter was very pleasant surprise. Thanks.

Well, but let me come back. The comment that the quarter was a pleasant surprise. From a fab product standpoint, the second quarter before non-run rate items was only $3 million better than the first quarter.

And that's why Joe and I spent most of our time in our comments focused on the 6 months because, frankly, we don't pay much attention to 3-month buckets. You get noise in there in 3-month periods. You still have noise in a 6-month period.

But the second quarter was a little bit better than the first quarter primarily because of we were able to get our costs more in line with the lower volumes that we had in the other side of the business in the extrusion side of the business.

Right. No I understand that. But I guess it's -- I know you guys don't necessarily look at the business the same way those of us analyzing it from the outside look at it. But even though you say it was only $3 million better, it's still on a -- if you try to break it down and look at it in terms of extrusion and then kind of your existing aero business or existing industrial/aero/plate, whatever you want to call it, and then the new business, I think last quarter cast into doubt what the, and I know you're not going to want to answer this question but I'm just trying to give you an example.

You cast into doubt what the return on that was and I think this quarter you guys have, obviously, you've given a lot more detail to help people get comfortable there, but it also shows that it actually is playing out, even if you didn't give that, that would still be enough to help you get a little more comfort. And, obviously, with the way the stock's been trading lately, there was quite a bit of speculation that there was some kind of an issue here and I think this is allayed that fear.

I think that's a very good point, Rob, and that's why we went to great lengths here to try to put some more context on what's underlying the numbers here. Because the fact is that from a heat treat plate standpoint, the first quarter and the second quarter were very, very close.

Right. Yes.

So, and that's why I keep saying perhaps we didn't articulate as well as we should have in the first quarter and that's why we've given some more information here because the first quarter and second quarter for heat treat plate were similar.

Most of the change first quarter to second quarter is that we got our costs catching up. The reduction in costs lagged the reduction in volume in the other side of the business.

Right. I can just tell that there's still, it's a new company and you can just tell by the questions on the last call and the earlier question today that there's still quite a bit of confusion out there and I think you guys are starting to get your finger on the pulse of what the confusion is and it's definitely (inaudible).

Exactly. And yes, we're trying to listen and trying to put our comments in a context that helps the investors better understand what's going on with the business here.

Yes, it definitely shows up. Thanks a lot. I appreciate it.

Thank you.

Our next question will come from Randy Selleck with [Motorock] (inaudible) Capital.

Hi, this is Randy Selleck from Motorock. Thanks for taking my question.

Yes, Randy.

I just have a detailed question not relating to the core business. Your net operating loss carry forwards, I think there's triggering provisions that if there were a change of control would cause limitations to (inaudible) for the Company to be able to use that.

Does that undergo a change in a year or two years or something like that where in the passage of time because of your emergence from bankruptcy you're able to effectuate a triggering event without causing a limitation on your NOL or is it just a straight NOL that runs out whenever you use it and that's it?

Randy, what we've done to add more disclosure is in our Q, Item 5 under "Other Information." It details this idea, but the NOLs basically have been put into place.

The NOLs are very valuable to the Company and we attribute the tax attributes of those NOLs to be between $975 million and $1.025 billion. And really there's several key points, but one key point is through July 6th of 2008. If there's any change in control as defined, then the Company would lose the benefit of all the NOLs since emergence.

We have protections in our corporate charter on the union (inaudible) who's our largest shareholder basically with the current ruling that's detailed there. They're basically unable to sell any shares until the latter part of January of 2009 and 5% holders have limitations or restrictions on what they can do so as not to trip that. After July 6th of 2008 there's a section of the Code 382 that defines the limitations annually of the NOLs.

Okay. I think I saw that. Thank you.

(OPERATOR INSTRUCTIONS) We'll now go for a follow-up to Matt Teplitz with Quaker Capital Management.

Sorry to abuse it, but if your time's available. Few quick questions.

Is there any seasonality in particular among your four quarters to bear in mind?

I'm sorry, ask that again.

Is there any seasonality we should bear in mind looking at your quarters?

Yes, although we don't talk about it quarter-to-quarter, we talk about it first half versus second half, and if you go back to the notes on my slides where we talk about the outlook for the second half, we talk about normal seasonality.

I think on the last call or one of our recent calls, someone asked about seasonality and our normal rule of thumb is that the first half is roughly 55% of shipments and the second half is 45% all things being equal. All other things being equal. And that's really a function of customers having fewer work days because a lot of them, especially in the ground transportation area, take vacation shutdowns during the summer months in the third quarter and then in the fourth quarter there are all the holidays and there are shutdowns around the holidays and hunting season in the midwest and the upper west that impact total demand. So yes, there is seasonality.

Okay. Given the, I guess, roll on of new capacity, that might be somewhat offset this year possibly, but I guess we'll see.

Well, the statement we've made, Matt, has been that in the heat treat plate segment, we expect shipments in the second half to be similar to the first half. Our other components of the business will go through the normal seasonality that Jack just talked about.

That's fair. There's two other questions here.

So thank you for breaking out in terms of the incremental capacity the three different phases bring on in terms of heat treat capacity. And so, I guess, that in sense answers perhaps volume questions. I guess in theory, all volume's not created equal in terms of margin contribution.

Is there -- is it fair to look for more incremental contribution from the subsequent phases or is that unreasonable in a sense of greater facility and capacity utilization bringing more incremental margin with the additional 40 and then the later additional 20% coming on?

That's a difficult question to answer. There are a number of variables involved there and one variable is what margin means to you. That's a key variable. I don't know if you're looking at margins on the total business or what we look at are variable margins on the individual product lines.

I'll go back to the answer that I gave to Rob a few minutes ago. There was a step change up in prices that began in 2005. Another step change improvement in 2006. And surprising to us, we've had improved pricing again in heat treat place in 2007.

We thought 2006 would be about as rich as it would get. And again, part of that's how our marketing people have been able to manage the specific mix of customers and products that we've been putting through the plant this year.

And so while our contract business and there's a slide in the appendix, slide number 26. Slide number 26 we put in some discussion to address the issue or try to put some context on the issue of what's happening to our margins in total. But Joe, there's another chart. Actually Slide 27 is the slide that I wanted to speak to, which is your heat treat plate discussion.

In heat treat plate, historically roughly 60% of our business has been contract business and 40% has been spot business. As we go forward, we anticipate that order of magnitude 80% will be contract business and 20% will be spot business. The spot business, obviously, is significantly more volatile than the contract business.

So part of the reason that we're so reluctant to talk about margins is that historically, and that still basically applies here in 2007, we're still operating with roughly 40% of our business being spot business, which means the pricing is set on less than a 12-month basis and so that we get extreme volatility.

And I'm going to put another number out there. When we look at our margin for heat treat plate the first half of this year and we compare it to the run rate that we had 1999 through 2004, if we were just doing that same price calculation that yielded $8 million better than 2006, it was $40 million better in the first six months of this year than the average price that we had from 2009 or 1999 through 2004. And that gives you some dimension of the volatility that's been in there.

Our objective, people ask us a lot of questions along the lines of what's your contract mix and how rich are those contracts? Our objective is to get much more stable pricing going forward.

Would we like to have prices better than where they are now? Yes, but what we're really trying to do is to avoid prices that are $40 million worse than what we enjoyed in the first half of this year, which happens to be the long-term run rate of prices for heat treat plate.

So, again, I didn't answer the question, and I'm not going to forecast and speculate on what heat treat plate prices will be in the future and how that will impact our total mix. All I'll say is these are very rich prices that we have now and our objective is to hang on to this kind of rich pricing as long as we possibly can when we look at the entire mix of customers, contracts, and spot business as well as the alloys and products that we supply.

You've been very forthcoming. Just in terms of what you're showing is the future, is that '08, is that '09, you know, where the 80/20 mix?

Yes, that's really, I'd say that's when all of the capacity is on. So let's say at the, in 2009 we should have evolved by the end of next year, evolved where we'll be more like an 80/20 contract spot mix versus the 60/40 that we've been historically.

Okay.

And we expect that that's going to significantly reduce the volatility that we've seen in our pricing.

I can see why you would want that. I really wasn't trying to be all that cute about the question, I was just trying to get a sense of if pricing being constant if you brought on more capacity presumably there were efficiencies gained. Anyway, I understand. You've given a lot of detail.

The last question here. Just in terms of the $91 million spend on your non heat treat business, are you comfortable also sort of breaking out what percentage of that would be capacity versus efficiency?

I'm not going to go to that number, but predominantly it is efficiency. And our plan is and, again, this is one where market shares fluctuate in and out over periods of time, but we program this at basically what our historic market share has been. So this is not predicated on a major change in us anticipating a major change in our market share from what we have historically enjoyed for these product lines.

Does it anticipate, though, some meaningful change in your sort of production footprint once this is completed other than obviously you're adding a midwest plan?

Yes. Yes, we're, we will, today most of our rod and bar production is produced in our Bellwood, Virginia, plant and a Tulsa, Oklahoma plant, and in the future, almost, and this is for rod and bar shipped east of the Rockies, in the future, almost all of that will come from the new Midwestern facility. So, yes, it's a significant change in the footprint that we will use to manufacture rod and bar products.

But does that imply, then, new product lines being introduced in Virginia and Oklahoma?

Yes, that's a good question. The Bellwood, Virginia plant today is, it's not quite all things to all people but it's close to all things to all people with the significant amount of seamless extruded tube and seamless drawn tube as well as significant rod and bar production. Our vision for that facility in the future is as a focused, seamless, extruded and drawn tube facility.

And the Tulsa operation we're looking for other products. It has tremendous capabilities but has some inefficiencies because it does not have a remelt and it's far from the Midwestern, the heart of the market. So we're looking for other alternatives to utilize those capabilities in our Tulsa plant.

Thank you very much.

[OPERATOR INSTRUCTIONS] And due to time constraints we have time for one further question. And that will come Lee Lignos with Lakeway Capital Management.

Yes, hey, guys. One question that I forgot to ask you. This is Rob again.

Can you just talk about what the stretcher coming online will mean for the business and what you're willing to talk about there?

Sure. The stretcher, frankly, is a cornerstone of the entire investment program. While it doesn't specifically increase capacity, what it does do is give us a capability we've not had in the past to produce heavy gauge plate.

Even today we're still restricted on aerospace plate to a maximum of 3-inch thick plate, the stretcher will enable us to go up to 8-inch thick aerospace plate. And the market, more than 50% of the market, is above 3 inches thick. So it opens up a significant window in the market that we've not been able to participate in in the past, and that's been instrumental in us enabling us to book many of the major contracts that we announced over the past two years.

Had we not been introducing the stretcher with the attendant capability to produce heavy gauge plate, there's no way we would have had the ability to book business that would enable us to double the capacity at Trentwood.

And I guess there's only a handful of people in the world that can actually make that heavy gauge plate?

That is correct.

And have you talked at all about the pricing for that product versus the other aerospace plate the lighter gauge?

We have not.

Okay. Okay. That does it. Thanks.

Thank you.

And that would conclude our question-and-answer session. At this time, I'd like to turn the conference back to Mr. Mordock for any closing remarks.

Thank you, everyone, 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.

Thank you, everyone, for your participation on today's conference call, and you may disconnect at this time.