Kaiser Aluminum Corp (KALU) 2007 Q3 法說會逐字稿

Good day, and welcome, everyone, to the Kaiser Aluminum third 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 call over to Mr. Geoff Mordock. Please go ahead, sir.

Good afternoon, everyone, and welcome Kaiser Aluminum's third quarter 2007 earnings conference call.

If you've 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, Vice President and Treasurer, Dan Rinkenberger and Chief Accounting Officer, Lynton Roswell.

The information contained in this presentation includes 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 September 30, 2007 and reports filed with the Securities and Exchange Commission including the Company's Form 10-Q for the quarter ended September 30, 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 the statement to actual results or changes in the Company's expectations.

Non-run rate items to us are items that, while they may occur from period to period are, one, particularly material to results, two, impact costs as a result of external market forces, and three, may not reoccur 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 Products 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 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 will allow for questions and answers. Jack?

Thanks, Geoff.

As Geoff mentioned, you may follow our remarks by viewing the slide presentation on our Web site at kaiseraluminum.com. My remarks begin with a brief overview on Slide 5.

Our organic growth program has strong momentum. The $139 million Trentwood expansion remains on schedule and is making a significant contribution to improved results. And activities are under way on $91 million of initiatives to achieve improved efficiencies within our rod, bar and tube value streams.

Our financial condition is strong and improving and we have significant financial capacity to fund additional growth initiatives. Our financial results this year are a step change compared to prior year and the Trentwood expansion is a key element driving the improved results.

Slide 6 provides an overview of the Trentwood expansion. The first phase of the expansion became fully operational early this year, and as mentioned on the prior slide, the year-to-date results reflect significant benefits from this investment. The second phase is scheduled to be fully operational early next year, and the third phase is scheduled to be fully operational late next year.

We anticipate that heat-treat plate output in 2008 will be impacted by planned heat-treat furnace downtime related to Phase III construction, scheduled for mid-year 2008.

Slide 7 summarizes the $91 million investment program which has a focus on improving efficiencies within our rod, bar and tube value streams. Our Web site has more detailed information illustrating the rational for these investments. We expect the program to be fully implemented by the end of 2009.

Turning to Page 8, we reported consolidated operating income of $139 million for the nine months year-to-date, up 88% from prior year. Record operating income from our core Fabricated Products business segment was driven by benefits from the Trentwood expansion. The record Fabricated Products results was achieved despite soft ground transportation and general industrial demand and service center destocking of rod and bar.

Joe will provide additional color in his remarks which follow.

Thanks, Jack.

We are pleased to have reported that our operating income for the first nine months of 2007 was $139 million. We generated $89 million in cash flow from operations, which has funded our capital spending of $43 million, primarily at our Trentwood facility. In 2007 we have continued to strengthen our balance sheet.

Turning to Slide 11. Our net sales on a consolidated basis for the first nine months of 2007 was $1.14 billion, up 12% over last year. We have continued to benefit from favorable product mix and value added pricing and in addition from higher underlying metals prices.

Total Fabricated Products shipments were up 3% year-to-date. Shipments of heat-treat plate were up significantly compared to the first nine months of 2006, and this is what contributed to the richer product mix.

On Slide 12 we discuss net income results. Net income year-to-date was $77 million, and it reflects strong results in both Fabricated Products and Primary Products segments. 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 11%. We expect this 11% rate to continue in the fourth quarter and the full-year as well. Our 10-Q provides more details.

On Slide 13, we discuss operating results which we believe provide a more meaningful metric for making period-to-period comparisons. Operating income of $139 million for the first nine months of 2007 include $21 million in non-run rate items. Operating income before these non-run rate items improved 66% year-over-year, from strong results in both Fabricated Products and Primary Products.

On the slides which follow, we'll discuss the financial performance of our three reporting segments in more detail.

In Jack's earlier comments, he noted that quarterly and year-over-year results were a step change from prior year. This is reflected in viewing our Fabricated Products results on Slide 14.

Our reported segment operating income was $129 million in the first nine months of 2007 compared to $90 million last year. Year-to-year we have benefited from a $10 million improvement from non-run rate items.

If we look at the operating income before non-run rate items on a year-to-date basis, our underlying Fabricated Products operating income of $126 million was $29 million over the previous year. The year-over-year improvement in operating income was driven by heat-treat plate products.

We realized a favorable impact of $37 million from the combination of higher heat-treat plate shipments and richer value added pricing. Partially offsetting these results was an unfavorable impact of approximately $6 million from shipments and value added pricing in our ground transportation and general industrial applications.

As Slide 15 indicates, our Primary Products results were stronger in the first nine months of 2007. Operating income before non-run rate was $28 million versus $7 million a year ago. The drivers for the improved results were higher realized primary aluminum prices, net of hedging, a favorable currency exchange, net of hedging, and improved contractual alumina pricing which began in April of this year.

On a reported basis for the nine months of 2007, Primary Products generated operating income of $32 million compared to $15 million for the comparable 2006 period. Non-run rate items are primarily unrealized mark to market adjustments for metal and currency derivatives and were $4 million unfavorable this year compared to last.

Additionally, Anglesey declared a dividend to its shareholders and as a result, we received a $4 million cash dividend in the third quarter.

On Slide 16, we showed a corporate expenses which are not allocated to the business segments. Excluding non-cash equity compensation for the nine months of 2007, corporate and other expenses are trending slightly lower than last year.

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

Thanks, Joe.

Slides 18 through 20 address the near-term outlook for the Company. Aerospace plate demand is robust but the ramp-up in demand is slower than anticipated. However, strong demand for armor plate is expected to cushion the impact.

Our current view is that the weakness in ground transportation and general industrial markets will continue into the first half of next year. And although destocking by service centers may continue in the fourth quarter, rod and bar inventories are currently at historic lows. We anticipate a swing to restocking when industry demand eventually begins to strengthen.

Slide 19 translates the market environment to Kaiser's situation in Fabricated Products. Although there is some downward pressure on spot prices for heat-treat plate, we expect that our very rich price and mix for heat-treat plate will continue into the first half of 2008.

As indicated in my earlier remarks regarding the Trentwood expansion, we anticipate that 2008 output will be impacted by planned heat-treat furnace downtime related to Phase III construction scheduled mid-year. Our expectation is to operate at approximately 95% of the Phase II capacity during the full year of 2008, with output increasing toward the end of the year.

Soft demand in other products is exerting some competitive pressure on prices, although the impact has been relatively isolated. We expect normal seasonality. In the fourth quarter that means fewer customer work days but it also means that we are approaching the seasonally strong first half.

Planned major maintenance costs are expected to be high in the fourth quarter, but as we experienced in the third quarter, may be partially offset with improved manufacturing cost performance.

Slide 20 addresses the near-term outlook for Primary Products. The fourth quarter result before non-run rate items is expected to be consistent with the year-to-date trend.

Looking into 2008, we will not enjoy the benefit from currency hedges that have had a favorable impact on 2007 results. At the prevailing exchange rate in the third quarter, the gain from currency hedging averaged approximately $1 million per month.

We also anticipate that unfavorable 2008 impact from freight costs on shipments of alumina to the Anglesey smelter. We expect to experience higher freight costs of approximately 1 to $2 million per quarter beginning in April of 2008.

Slide 21 summarizes today's report. We recorded another strong quarter and excellent year-to-date financial results. Business conditions through the first quarter, fourth quarter and into 2008 are expected to be similar to what we've experienced so far in 2007 with normal seasonality and the potential for softening in prices for certain products.

The organic growth program has momentum and is already delivering results. The $139 million Trentwood expansion is scheduled to deliver another step change in heat-treat capacity in 2008 and an additional step change in 2009. And the $91 million rod, bar and tube initiative is under way and is scheduled to deliver significant financial benefit by 2010.

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) We'll pause for just a moment to assemble our question roster. We'll take our first question from Tony Rizzuto with Bear Stearns.

Hi, Jack and Joe. How are you guys doing?

Great. Thanks.

Regarding your commentary, guys, on the aerospace and defense related applications increasing at a slower rate than anticipated, is this due to the carryover of the A380 or other factors?

I would say it's primarily the A380 delays.

Are you seeing in any way, Jack, anything related to potential delays and, certainly the six- month delay in the 787 program?

We've not seen anything tangible. Obviously, in terms of total demand, it'll have some impact but we don't anticipate it's anywhere near the magnitude of the A380.

In regards to the planned production interruption you're talking about for mid- '08 when you come on with the Phase III construction, can you give us an idea of the magnitude of the impact on the heat-treat? You mentioned for the full-year you're going to get 95%.

Yes.

So can you be a little bit more specific perhaps in terms of quantifying the impact?

Yes, I would model it, if I were you folks, I'd model it in the 90 to 95% range during the first three quarters and we think it'll be relatively consistent quarter-to-quarter. So it'll be ramping up in the first quarter, then we'll have the production interruptions in the second and the third quarter, and then operating in the 95 to 100% range in the fourth quarter. So it's not huge, a huge step down in the first three quarters from that 95% rate but it'll be slightly below that.

Now, also in regards to Trentwood, is it fair to assume that there are going to be higher incremental margins once you've gone beyond these costs related to the expansion? Would it be fair to say that there'll be higher incremental margins on the remaining two phases? I'm wondering how you're doing on the certification process with the thicker gauge plate?

We're doing well on the certification process. Some is actually already certified, but it's a lengthy, elaborate process that we go through. But the certifications are going very well and we expect to be fully certified on everything by the end of the first quarter.

The other question was related to margins.

That's right.

In my comments, and let me go back to what I've been saying for the past three or four calls here, you'll recall I said late last year that we had -- we expected exceptionally rich margins on heat-treat plate as we entered the first quarter and we experienced that. We didn't think those were sustainable. But we've pretty well sustained those through this year.

And as I said in my remarks, we see those being sustained into -- even though we're seeing some pressure on prices, our total mix, we see that being sustained well into the first half of next year.

But I'll stick with my comments that we do not expect that margins, when we look at our total mix of customers and products, we do not expect to see those improving over time from what we've experienced this year. They continue to be extremely rich and it would be very difficult to sustain these kinds of margins for the long-term and we certainly don't expect to see an uptick in our margins going forward from where we are today.

All right, Jack. Just to follow-up on that, when I'm thinking about the thicker gauge plate and the costs involved in the hot strip mill and so on and so forth, to produce the three-inch plate seems to me there would be more costs involved.

So maybe part of what you're saying -- I want to make sure I understand this correctly -- while there could be some downward pressure on pricing, and we've had a very good period of pricing for heat-treat, you know, maybe it's fair to say that the costs involved in producing a thicker gauge plate might enable margins to be very similar overall. Is that a fair assessment?

Well, that could be but that's a very small portion of the equation. The bigger portion of the equation is the mix of products and customers that we sell, and I think we actually have a slide in the appendix here, but it's a slide that we also show when we go out on the road, that characterizes the shift in our mix, our spot and our contract mix, which historically has been around 50/50, gravitating toward an 80/20.

We've come off a period here, or we're still in a period, although we've seen some softening in spot prices, but we've had exceptionally strong spot pricing. So the bad news is also the good news. As we go forward, we do not expect that we'll see a continuation of the very rich spot prices that we've had over the past year to a year and-a-half, but that's the bad news.

The good news is that our business is shifting more dramatically to contract versus spot, and that puts a much stronger floor under the margins that we'll experience as the market begins to loosen up a little bit. So it's really that whole -- the character of the contracts versus spot and the total spot impact on our mix is the reason that I've continued to characterize that our total mix of heat-treat plate, price and mix, has been exceptionally rich here and we think it'll be difficult to sustain that.

I understand everyone on the outside looking at this looks at the heavy gauge plate and the implications of that, and while that's positive, it's really the impact of spot prices as it applies to our total mix of products.

Right. And certainly we understand that you are moving to the 80% kind of long-term contract spot.

I have one final question here and then I'll turn it over to others. But in regards to the rod, bar and tube investment project, you kind of stated in the release, the intensive work being done. Is it reasonable to anticipate some of the economic benefits prior to 2010?

Yes, but it will be very small. The bulk of it will start to come in late 2009 and be fully realized by 2010. But yes, we'll have some -- we have, one's relatively small project at Los Angeles that will be up and running by the middle of next year and so that will start to generate some impact, but it won't be enough to move the needle in terms of total results.

And then the Chandler will start to come on in early 2009 and then the bigger project, the major rod and bar mill will be late 2009. That's the big impact.

So if you had to -- if we were thinking about trying to estimate on a percentage basis in terms of some of the numbers that you kind of guided us to in the previous quarter in terms of the returns on the project, would it, you know, it sounds like it could be maybe a 30/70 split?

Not even that much.

Not even that much?

Yes, I'm going to get into dangerous territory here but I'm going to go there. In terms of second half next year, we're talking less than 10% of the total return, probably closer to 5 than 10%. And then as we get -- and it'll start to ramp up slowly in 2009, but the preponderance of it starts to hit very late 2009.

So in terms of modeling it, it's almost, you could almost ignore it until you get to late 2009.

Would you expect there to be any dislocation as you guys are making these efforts and modernization efforts and so on and so forth?

We think it will be very modest. I think we've said before that we would expect any write-off impacts to be less than $10 million, certainly single digits, and I think looking at it today, we think it would be considerably less than that.

All right. Great. Thanks very much.

We don't expect any big impacts. There may be some small ones in terms of negatives. And most of the positive impact will be late 2009.

Appreciate you providing a lot of color. Thank you.

Thank you, Tony.

(OPERATOR INSTRUCTIONS) We'll go next to Timna Tanners with UBS.

Good morning.

Good morning, Timna.

Good morning, Timna.

Thanks for the great detail. Wanted to just follow-up with two questions.

One on the discussion that we already went through a bit on the comment on softening demand or at least the slower pace than expected on aerospace and defense demand. What does that mean for contracts if anything going out to the extent that have you them and if you could remind us or give us an update on the extent of your contracts?

Sure. Let me take a step back. In terms of contracts, we have contracts with a number of customers and just about every contract or, in fact, every contract is unique, and it ranges all the way from contracts that are firm volumes and firm prices extending over a period of years, to contracts that have options on capacity. And typically those options have min-maxes and typically the customer has to declare, while it's a multi-year contract, typically a customer would need to declare a year ahead of time what kind of volume they expect to take over that next year.

So the answer is, it depends and some customers next year would not be taking their maximums, but again, that's what we've said all along, that our capacity is fully committed but that doesn't mean it will be fully used. However, the spot market is strong enough that at this point, we're very confident that we will run at capacity next year.

And as I said, it'll be about 95% of capacity year because the construction interruptions. But we expect we'll sell every pound that we can produce through our heat-treat operations next year.

Okay.

So the customers that had been lined up for the tonnage on the contracts are not necessarily taking all of the tons in the time frame they'd initially anticipated but the difference will be made up by the spot market?

Well, yes, it'll be made up by the spot market but also, again, remember, the customers give us min-maxes and someone who wants an option on capacity we price that very differently than someone who gives us a firm commitment to take the production.

So did we expect that everyone would take the absolute maximum of their contract every year? No, because someone who puts a min-max in, you would think they've given themselves some cushion on the top end of the range. We think it will be normal year by year that we could see some erosion from the absolute maximum on the contract volumes.

That makes sense. Okay.

And then the other question I wanted to explore with you is when we look at your balance sheet, certainly, you're now net cash even with a pretty strong Cap Ex program, so I was wondering if you could review for us the way you think strategically about priorities for cash use?

Well, our first priority is growth and we've acted on that with substantial cash allocated to organic growth. We think we've used up most of that opportunity, although we continue to search for other good organic growth opportunities, because those generally have the best return.

We're shifting our focus now to acquisition growth. We continue to believe that we're a very good platform for acquisition growth and we expect that we'll be funding acquisitions as we move forward as well.

But then beyond that, if in fact we have excess cash and we don't believe that there will be good opportunities, enhancing shareholder value with investments, we would then look to other alternatives to return excess cash to the shareholders, be that dividends, and we already have a regular dividend, but dividends of some sort, as well as stock repurchases.

And there are some restrictions on our ability to repurchase stock in order to preserve the NOLs, but there could be opportunities to do stock repurchases as well as dividends, although I come back and say the board's view and management's view is we hope that we use the excess cash that we have for good investment opportunities, either organic or acquisition growth.

What type of investments might be attractive to you at this time or what type of acquisitions? Is there perfect markets or geographies that you're targeting?

Well, in terms of geographies, our first priority is assets that generate U.S. income, because we have a very attractive set of tax attributes that shelter the income and so it gives a boost to the return on U.S. income investments. That does not mean, however, that we won't make investments in foreign income if those are strategically attractive investments.

And in terms of the businesses that we're looking at, we're looking for businesses that have synergy with the existing businesses that we're in. So we would look for like businesses or those that are logical extensions to our current business frame.

Great. Thanks very much.

We'll go next to Meryl Witmer with Eagle Capital.

Hi, guys. Good quarter.

You always talk about the spot market and I think, you know, I don't know if you said it on this call but in other conversations how it's near or at historical highs. I was just wondering if you've ever done any adjustments for the change in the cost of other variable costs, like labor, gas and electricity, you know, today versus back in the prior peak?

You mean in terms of the impact on margins?

Well, just, you know, I mean, the way it basically works is you buy the aluminum, you do something to it, it costs you a certain amount and the rest is gravy, yes. So in other words, the gravy portion, is it just as large as it was back at the prior peak or has, like, increases in gas prices and labor and electricity eaten into the gravy portion? On a dollars per pound basis, not even on a percentage margin.

Yes, when we look at the value added revenue, which is the revenue in excess of the price of aluminum ingot, our total mix, and this is spot as well as contract, because we don't separate it out, but when we look at that total spread and the value over our typical cost, it's at the prior peak and the prior -- this peak has lasted for several quarters.

The last peak that we saw was 1998 and it spiked up for a few months and then immediately collapsed into 1999. So the spreads are at historic levels.

In terms of those other costs, and I don't know if we've used this sound bite with you or not, Meryl, but we've spoken to the impact of our Kaiser production system and while its major benefits are in terms of quality and delivery and lead time, we've also been very successful in offsetting inflation in our costs and, in fact, Trentwood in particular has offset inflation and costs as well as reducing costs over time to the tune of 2 or 3% per year compound reduction in cost compared to inflation.

So in terms of impact on us specifically, we have very, very rich margins, even considering inflation, because we've pretty much offset those with reductions in our costs over time. If that answers the question.

Partially, at least, and maybe fully. Is that the labor cost you're speaking about or even the other for gas and electricity?

It's everything, although energy we separate out. We don't call that a controllable cost but, so, we separate out energy. But I would say even including energy, given the magnitude of the cost reduction that we've had on plate, or at Trentwood in total over time, I'd say we've more than offset inflation including everything over the past 10 years.

Okay. Would others have been able to have the same kind of a labor offset? Because I guess --

Not necessarily, and again, we're not just looking at labor, we're looking at all costs, the total controllable cost equation.

How much have -- is there a way to give a rough estimate of how much the energy part has gone up on a -- or down on a per pound basis from peak to peak?

There is, but I wouldn't venture there off the top of my head.

Is that something we can give you a ring on, just out of -- an item of curiosity?

I'm looking at my experts here. Yes, give us a call. We'll have to research it with everybody and see what we can disclose and how we would disclose that.

We've done a lot of work in cement. You know, we have sort of the rules of thumb, every pound of cement you need a certain amount of gas, a certain amount of electricity.

Yes.

And I assume there is some rules of thumb with aluminum.

Yes. Well, it depends by product. But yes, we have that and I don't have it at the top of my head.

Okay. All right. Great. Thank you.

Thank you. (OPERATOR INSTRUCTIONS) We'll pause for just a moment to assemble our queue. We'll go to Tony Rizzuto with Bear Stearns.

Thanks again for taking my question. Apologize about my voice today, gentlemen, I've got a cold I'm just fighting.

Got a question on the smelter. Is there any update on the viability of a smelter, i.e., are there any inroads that have been made into extending the power contract?

No new news to report there. We continue to work that hard. When I say we, I'm talking the joint venture between Rio Tinto and us in Anglesey. The landscape is a little more positive today with the new administration in the U.K. and their view on nuclear power.

So if you would ask us to put probabilities on it, and I'm not going to do that, but I would put a higher probability of success today than we would have 6 to 12 months ago. So we continue to work it hard.

Is there a chance that we'll be able to extend the life of the smelter? Yes. But do we have anything concrete that we're planning on or that anyone, any investor should plan on? The answer is no at this point.

Just to refresh my memory, I mean, the electricity supply is fired by nuclear reactor, correct?

That's correct. And that's the issue. The Blair administration was intent on eliminating the nuclear power and basically had given us a decision that the life of that plant would not be extended. It's under review again, but again, that doesn't mean that the life will be extended.

All right. And I just wanted to ask about your alumina contract. If the power situation were to become more favorable, i.e., an extension, do you anticipate any problems? Like could you easily extend the alumina contract from a supply standpoint and would that -- do you see any issues there?

No, we think we would be okay in terms of alumina. The critical issue is simply the availability to power.

Okay. And on the alumina side, should we be assuming for purposes of modeling, 11 to 12% kind of index to metal? Is that fair?

I'm looking here. Have we put the alumina price in the 10-Q?

We haven't.

Yes, it's in the mid-12s.

Mid-12s?

Yes. And it's consistent in '08 with what we've had in '07.

Okay. Very good.

And the other question I have is your comments, Jack, on the uses of cash and you sounded like you felt you had exhausted a lot of the exceptional investment opportunities, organic-wise, but should we rule out any further incremental expansions at Trent wood? When I was out there, at least my impression was you had the capability to incrementally expand perhaps with much less capital.

No, it should not be ruled out but, again, I'll replay the scenario here. We had the Phase I and then demand was overwhelming and we quickly moved to a Phase II. In Phase III, the genesis was announcement by or concerns, public concerns, expressed by customers early this year that industry capacity was insufficient and we went into a full court press with our entire customer base, which led then in the second quarter to an announcement of Phase III.

But at this point, we believe our capacity/industry capacity is pretty well sufficient to satisfy demand over the next few years. However, should that change, or should specific customers come to us with a need, we certainly believe that we're as well positioned or better positioned than anyone to meet that need with capital efficient capacity.

If you strictly look at narrow body, I mean, we've watched, obviously, in recent days and we've seen the Middle Eastern carriers and Quantas announced some very, very substantial orders for the A320 as well as the Boeing 737-700. Could you give us an idea of what percentage of your current mix on the commercial side those aircraft would comprise?

I don't know that and I'm not sure my marketing people even know that. I mean, we -- the same plate is basically used in all aircraft. So when we have a bid with a Boeing or an Airbus or any other airframe manufacturer, they just give us a stock list of various plate sizes that they buy and we don't know which specific aircraft in most cases those products go into.

So from our view, we're just -- we look at what are the aircraft being built and how much plate in total do we think is consumed by each of those aircraft. That's how we come up with our view of the size of the total market and the growth of the total market.

Okay. Just a final question.

I mean, are there any developments on the supply side for heat-treat that have occurred here? Any incremental changes or announcements that have changed your view on the relative level of equilibrium?

None that have changed my view. Again, the only one of consequence I know of was our announcement in the third quarter and that was in response to customers concerned about the sufficiency of industry capacity and we think we addressed that thoroughly, but again, who knows, things change in this business and change rapidly. If there's another opportunity we'll move on that opportunity.

All right, Jack. Thanks very much.

Thanks, Tony.

We'll go next to Timothy Hayes with Davenport & Company.

Good day, gentlemen.

Just one question on corporate expense. Saw that there was about $3 million less year-over-year. What should we be looking for as a run rate there?

We enjoyed a good quarter, Tim, and we put some additional color in our MD&A. We had some lower tax services expenses and we also had some favorable medical cost experiences. It's probably not necessarily sustainable.

I'll caveat that and we'll probably put it in our 10-K is that we're finishing up our first full year of Sarbanes-Oxley compliance and the costs with the integrated audit as well as some outside services, we think are front-loaded in this year. I think we said all along, we think that it ought to be trending down by $1 million, $1.5 million per quarter going into the next years and we'll be able to sustain that, net of the non-cash compensation expenses which are separate grants.

Very good. Thank you.

You're welcome.

We'll go next to Dan Whelan with Bear Stearns.

Most of my questions have been asked but just to touch back on the potential for acquisitions again, it sounds like just to take advantage of your tax position that you're maybe targeting domestic based acquisitions, but is it also fair to say that maybe to diversify your end market exposure that you're looking at other end markets as well? It seems by the time we get out to '09, you know, maybe three-fourths of EBITDA could be aerospace related.

Well, I'll come back and say we're looking for related businesses and yes, we want to keep a diversified mix of end use products, but we also believe we have a very strong position in aerospace so we certainly would not rule out attractive acquisition as it relates to aerospace.

So the answer is, we're going to go where there are good synergistic acquisition opportunities either in existing markets or other end use markets where we don't currently participate but where we have technologies or capabilities where we believe we can bring value. So I've left the field wide open there. Sorry.

Okay. Fair enough. Tough question.

We'll go next to Ron Silverton with Asgard.

Good morning, gentlemen. Congratulations on a solid quarter. A couple of q's.

First off, the Cap Ex number, you guys had previously guided for a Cap Ex for the year and it looks like you've only spent about half of that so far. Maybe less than that.

We have guided to -- we have a corporate overview that we just posted also today. It's under Our Events.

We have said we're going to spend approximately 80 to $90 million this year in Cap Ex, while we've through three quarters spent $43 million and we've said next year 80 to $90 million. That contemplates us continuing to build out phases and make down payments on certain things related to equipment at Trentwood and also it contemplates payments for our greenfield site. Most of that 80 to 90 will occur in '08 for that.

So as we look at it we have a, as we look at our Cap Ex we have about normal capital ex of growth for announced large projects of about $15 million a year, which is about similar to our currently calibrated depreciation and then the rest is for growth.

And the way we've spread it out is, again, just to summarize, the balance of this year we'll continue to spend some monies on the Trentwood expansion, some for Phase III, as well as some down payments on the greenfield site. And then next year a bulk of the spending will be the $15 million plus a larger portion of spending for the greenfield site and then the final chunk of the Trentwood expansion.

Okay.

I guess I was just a little surprised that it was so low right now given the amount of, you know, $139 million allocated for the Trentwood expansion, I would've thought the bulk of that, certainly, for Phase I and Phase II would already be, already been spent given where you are (overlapping speakers).

I don't have the exact numbers with me right now and we'll probably clarify that at year-end. But the expansion began, the original down payments began in '05 and we did spend a considerable amount of money in '06 on Trentwood. So we've spent more than half and probably about 65 to 70% of our total $139 million on Trentwood already. It's either in construction processor it has been capitalized.

Okay. And then apologies, I haven't had the chance to go through the Q and the MD&A section closely, obviously there's a little bit of commentary in your presentation here.

Can you talk a little bit more about why we saw the operating margin per pound drop this quarter? As you've talked about, clearly, it's a good number versus historically and certainly nothing to complain about, but just perhaps give a little more color around what's happening there.

We provide color in our overview with some backup slides. We prefer to look at operating income per pound. It's before non-run rate items. I believe if you looked at that, you would find that our income per pound in the third quarter was very similar to our first half average.

Okay.

Well, I guess, you know, it was $0.33 in the second quarter, down to $0.29 this quarter and I was just really trying to understand what the drivers were behind that.

That's before non-run rate?

That's after (overlapping speakers).

Looking at reported.

No, no, I'm making all the usual adjustments.

We haven't analyzed that. It would be dangerous for us to go into that territory because, frankly, we don't manage the business on that basis. But if you were to pin me down, I'd say that our mix may have changed a little bit. That's a portion of it. That's a portion of it. And the other portion is we had higher major maintenance costs in the third quarter than we had in some prior quarters. But again, we'd have to do some research on that. We don't analyze it that way.

We focused on the year-to-date number of $0.31 (inaudible).

(Inaudible), clearly a tremendous year-over-year improvement. I'm just trying to understand what happened in the recent quarter versus the prior quarter in terms of mix.

Let me make a point on this and again, this is, we do not have an objective of margin per pound. We put it in there because so many analysts ask us about margin per pound.

My goal is to drive that number down. And the reason I want it to go down is that our lower value added products have been very soft this year. So it will be very good news if we move into next year and that number comes down because most likely it will be a consequence of strengthening in those ground transportation and industrial markets that have relatively lower margins per pound.

Understood, Jack. And that's part of what I'm trying to back into because you guys are very cautious for competitive reasons but providing a lots of detail on the heat-treat and even on your plate margins so we've got an aggregated number and I'm trying to understand what's happening with underlying business. And, clearly, the op line number, given seasonality, your top line number for the quarter was very strong.

Yes, I would -- I'd characterize it as noise. I mean, when I look at the first half run rate versus the third quarter, what you're seeing there is just quarter-to-quarter noise. There was not a significant change in the business in the third quarter compared to the first half.

Okay.

Would you say that the typical seasonality still holds true in terms of 55% of sales coming in the first half, 45% in the second half? That that would apply for 2007?

Yes, for products other than heat-treat plate and we saw, frankly, stronger shipments than we expected other than heat-treat plate in the third quarter. We did not get as much seasonality ourselves as we typically would have experienced in the past.

And pricing, however, is that holding up or are you seeing real pricing pressure outside of heat-treat?

There is some downward pressure on pricing and I think we mentioned that in the Q and I know I referred to it several times in my remarks here. But there has been some downward pressure on pricing in those ground transportation and industrial markets.

And is that being made up for in volume? Because year-over-year the difference is less than $1 million. I should say versus the third quarter last year.

Yes, the third quarter -- year-to-year, third quarter last year the third quarter was already beginning to deteriorate. And as I said, we had a pretty strong third quarter in other than heat-treat plate volumes, all other things being equal.

So when I look at Slide 14, Fabricated Products, and there's a comment there about unfavorable impact from volume and value-added price and ground transport and general industrial, approximately $6 million, that was over $5 million in the first half, so we're talking about less than $1 million in the third quarter?

Yes.

It sounds like you guys are doing a pretty good job of holding up in the industrial and, I guess, auto sector versus really versus the industry. Is that a fair extrapolation or is it really volume making up a lot of difference or is the pricing just holding up really well? Or in fact, getting some increases there?

I'll put two points on it. One point is in the automotive side, we've had some new programs launch in 2007 that have increased our share. So while we're moving with the total market and builds in automotive, we do have some penetration in terms of new programs that we've captured. So that's one element of it.

In the truck and the trailer, I'll put a third point. In truck and trailer, we're pretty much moving with what's happened in the market in truck and trailer.

In rod and bar, frankly, we were disappointed in our situation in the first half of the year and in the third quarter, we had an improved position. We were back to what we would characterize as more normal market shares in rod and bar in the third quarter than we were in the first half.

So -- and that's part of what you're seeing here is the automotive new programs coming on as well as our market share got closer to normal in the third quarter than it had been in the first half.

Got it. Again, thank you very much, gentlemen, and congratulations on a solid quarter.

Okay. Thank you.

We'll go next to Lee Lignos with Lakewood Capital.

Hey, guys, it's actually Rob [Bledsoe]. How are you doing?

Good, Rob.

So there's a few things that I want to try to clarify. One, you said you had some major maintenance in the quarter. Can you quantify that? In terms of dollars?

Yes, but not off my fingertips here. Do we quantify that in the Q?

Yes.

It's a few million dollars. Yes, it's in the -- yes, it's in the 3 to $5 million range.

Okay.

And then you talk several times in your presentation, your press release, your commentary about step change in '08 and '09 and I'm assuming, I guess, even in '10 when you get the rod and bar going.

That's correct.

And the other thing you say a lot is, and you've been saying this now since I met you and, I guess, this is just the conservativeness in you, that you think that prices are unsustainable or unsustainable prices or mixes or whatever, you made those kind of comments for several years now.

Is it possible that this kind of commodity, and I think Meryl was trying to kind of allude to this in her question, you have copper which historically had been trading at $0.50, is trading at $3.50. Oil's $100, aluminum prices, just raw aluminum prices have tripled. Is it possible that with this commodity boom that we're seeing, that this quote unquote unsustainable level of pricing might be sustainable for at least quite a while until the overall market calms down?

Because in talking to people like Reliance who sell the product, that certainly would be consistent with what they would say. I don't think they view this as like a one-off market. I think what they would say is that 2006 was a year where pricing in the spot market in aerospace plate was off the chart. It came back to reality in '07.

I suspect maybe that's what you're alluding to in some of your commentary. But when you look at '08 and you ask them, they say they don't see anything changing from '07 to '08 in that market, unless the overall commodity markets kind of implode. Am I out of bounds thinking about it in that respect?

Well, first of all, in terms of the commodity markets, when you talk about aluminum and copper and those commodities, we pass those through. So those really don't have an impact on us. We look to be neutral on that.

No, I understand that, but they definitely, and I think this is what Meryl was trying to get out with her question. They've got to have some kind of impact as they are the, you know, they're part of the input cost, so is energy which is also, I mean, oil's gone from $30 to $90.

You've just had a lot of inflation in the industrial sector, generally speaking, and everybody's been raising prices across the board and effectively that's what's happened with your product. At least that's my impression. And what I'm trying to figure out is, is there some reason why yours is going to fall of a cliff and everyone else's is going to stay sky high when you have a very tight supply demand characteristic, you have a huge backlog, pent-up backlog to build airplanes that has to have this product.

It just doesn't seem, I mean, to expect the prices to continue to go into the sky, if that's what you're trying to keep people from banking on, that's fair, but I mean, is it fair to say that it's going to come crashing down next week or allude to that?

No, I've not alluded to that. Let me repeat what I've said.

What I've said is that we are at historically rich price and mix and we now expect that to run well into 2008. So we're expecting a similar price and mix in 2008 to what we experienced in 2007. However, we are very concerned that this rich price and mix is not sustainable for the long-term.

And by not sustainable, I didn't say fall off a cliff and, in fact, I'm quick to point out that what's different today versus the old pre-expansion Kaiser is I might be be saying it would fall off a cliff because I can assure you that the prices in 2003 for Kaiser with a very high percentage of spot business were significantly lower than they are now.

We don't expect any kind of a return to that because we'll have a much higher percentage of contract business. But contract business does not get booked at peak spot price levels. You just don't write five to seven-year contracts on that same kind of basis.

And let me add another point, because I have extrapolated what's happening to our stock price when metals distributors have their earnings calls and make comments. What is a spot market for aluminum distributors is not the spot market for a mill. The mill -- our spot customers are people like Reliance and Castle.

So we're selling to them at a mill spot price and what they're seeing in terms of their spot prices could be a completely different market and not could be, is a completely different market. And that's why you see in the last two quarters comments that have been made by distributors about spot pricing have been very different from the comments that this mill has made about spot pricing.

Right. Okay. That's fair.

Now, with respect to the balance sheet, I mean, obviously the Company is generating a significant amount of cash, if it continues on at this pace you're going to have enormous pile of cash in a couple of years, you know, assuming nothing gets done with it.

Is there any type of time frame that we should think of as shareholders that we should be kind of thinking about the cash pile up and also the fact that you have a pristine balance sheet, and you have a company that could probably withstand some amount of leverage. So there's a lot of excess capital sitting there on the balance sheet if you look at it that way.

We're not going to put a time frame on it but what I will tell you is that this has high visibility with us and the board. Going back to when we formed the new board, we developed financial guidelines where we have minimum thresholds of liquidity and, quote, maximum thresholds of liquidity that we believe are prudent for the capital structure of the Company.

And when we exceed the maximums, we talk about that intently with the board about what the plans for that excess are, with again, the -- in priority sequence, the first priority being to fund good value creating investments for the Company and then secondly, if we don't see those on the horizon, moving to ways to get that back to the shareholders either through stock repurchases and/or dividends, be they regular dividends or special dividends.

Right. Okay.

So the point is, we're not going to let it build to the sky. We're either going to put it to work in terms of investments or we're going to find a way to get it back to the shareholders. It is not our money.

That makes perfect sense.

And then with respect to the step change commentary, can you try to elaborate a little bit more on that and what you mean by that? And perhaps put a little bit of a definition on it or is that not what you really want to do?

No, I'll do that as well as I can. In 2007, and we've been transparent in communicating the impact of the Phase I and if you look at our charts, a Phase I is roughly 1.6 times our baseline capacity in heat-treat plate. So it's clear what a 0.6 increase in capacity has meant.

And then if you look at Phase II, which is put in at 2 times, and we said next year we're going to operate at 95% of that, that's 1.9. So it would suggest that the step change in 2008 has roughly 50% of the value that the step change in 2007 had.

And then Phase III and we'll be operating at that rate in 2008, is at 2.2, so it's another 0.3. So what we're saying is the step in 2008 is roughly half of what we had in 2007.

And the step in 2009 is roughly half of what we had in 2007. And then we said in 2010 we said that the rod and bar initiative would deliver the equivalent of about a 3.5 times EBITDA return on a $91 million investment which puts that in the mid-20s.

That's fair.

And then, I guess, to come back to Tony's earlier question, you know, when we visited your plant, I think, one of the comments that we heard is that as the full rollout happens, there will be some improvement, you know, as you run more volumes through the system on a relatively fixed cost structure, there will definitely be improvement in the overall margin of the operation. Is there some reason why we shouldn't look at it that way?

We will not add overhead an a proportional basis. That's correct.

Okay. So then there will be -- that's another kind of uptick opportunity (inaudible).

I think we've always said that after the investments are in place and through our TPM and other process of lean manufacturing we could get some capacity creep to the tune of 2 to 3%.

Right. But then, it's the capacity creep's the longer-term. I'm talking about more just as you go from 1 to 1.6 to 2.0 to 2.2, the cost structure, you know, you're going to get whatever you want to say you're getting per pound today, the net-net effect when you have it over a more fixed cost structure is going to be higher dollar on that last incremental pound than on the first incremental pound.

That's correct, Rob.

That's what, I think, Tony was trying to ask and I think it got lost somewhere in there.

No, no, I agree with you. That is correct. We do have some additional overhead required to support the significant increases in volume that we're putting through our operations. But the punch line is, that's not going up nearly proportional to the amount of capacity and through-put that we're adding.

Right. And then I would imagine that the stretcher gives you a little bit more juice as well, just given that it's the more specialized product that results from that process?

I mean, I stand on my earlier comments there.

Okay. Thanks a lot, guys.

Okay. Thank you.

And with no further questions, I'll turn the conference back to Mr. Mordock for any closing remarks.

Thank you, everyone, for joining us today. An audio replay of this conference call will be available on the Investor Relations page at the kaiseraluminum.com Web side for the next 30 days. Have a good afternoon.

Thank you. And once again, ladies and gentlemen, that will conclude today's conference. We thank you for your participation, and you may disconnect at this time.