Kaiser Aluminum Corp (KALU) 2008 Q4 法說會逐字稿

Good day, and welcome to the Kaiser Aluminum fourth quarter 2008 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 Ms. Melinda Ellsworth. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's fourth quarter and full year 2008 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at www.kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me today are President, CEO, and Chairman Jack Hockema; Senior Vice President and Chief Financial Officer Dan Rinkenberger; and Chief Accounting Officer Neal West. Jack and Dan will review the results, and at the conclusion of our presentation we will open the call for questions.

Before we begin, I would like to remind the audience that 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 the 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 in the fourth quarter and full year ended December 31, 2008, and reports filed with the Securities and Exchange Commission. All information in this presentation is as of the date of the presentation. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company's expectations.

Non-run rate items to us are items that while they may recur from period to period are particularly material to results, impact costs as a result of external market factors, and may not recur in future periods if the same level of underlying performance were to occur. These are certainly part of our business and operating environment, but are worthy of being highlighted for the benefit of the users of our financial statements. Management's intent is to significantly 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 a full year. Further presentations, including such terms as net income or operating income before nonrun rate or after adjustments, are not intended to be and should not be relied on in lieu of the comparable caption under Generally Accepted Accounting Principles, 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 call over to Jack Hockema.

Thanks, Melinda, and good afternoon, everyone. As Melinda mentioned, you may follow our discussion by viewing the slide presentation on our website at KaiserAluminum.com. I will begin today with a high-level review of 2008, and then turn the call over to Dan Rinkenberger who will review some of the financial details. Then I will share some thoughts on our outlook before opening the call for questions.

Turning to slide 5, and a brief look back, let me begin by saying that we are pleased with our 2008 underlying results. Fabricated products operating income was the second best in our history. Strong aerospace and defense demand enabled record shipments for heat treat plate and supported solid results from the plants that supply product for these applications. As we've previously discussed, our 2008 results would have been even better had it not been for high energy costs and disruptions during implementation of strategic investment and product development initiatives which negatively impacted our manufacturing efficiency.

In spite of these challenges, we made significant progress in positioning the company for operational efficiency and long-term growth. For example, we completed the heat treat plate capacity expansion and successfully qualified our capability to supply heavy gauge plate for aerospace and general engineering applications. In addition, we are completing efficiency projects that will have an impact beginning early in 2009, including equipment and facility upgrades in our Chandler, Los Angeles, Sherman, and Newark plants.

Progress continues on our strategic investment in a world-class facility in Kalamazoo that will yield significant efficiencies in our rod and bar value stream. We anticipate production will commence in early 2010. Finally, we ended the year with financial strength that will serve us well as we navigate a challenging economic environment that we anticipate that will continue into 2009. I will now turn the call over to Dan, who will go into more detail regarding the fourth quarter and full year results, and then I will discuss some industry trends and their implications for Kaiser.

Thanks, Jack. The consolidated financial highlights are shown on slide 7. As Jack mentioned, our underlying operating income performance for the full year 2008 was solid as we delivered $116 million in operating income, excluding significant non run rate and predominantly noncash charges. In our fabricated products segment, we delivered $142 million in operating income excluding non run rate items. The fabricated products results reflected higher shipments from continued strong aerospace and defense demand. But this was offset by higher energy costs, lower manufacturing efficiencies, and the significant decline in demand for general industrial and automotive applications during the fourth quarter. In our primary aluminum segment, the fourth quarter results included $10 million of insurance proceeds.

For the full year, we delivered $20 million in operating income excluding non run rate items, despite operating at lower capacity levels after the transformer fire at Anglesey in June of last year. Our reported results reflected significant non run rate items that I will discuss in more detail on next slide.

For the full year, we reported a net loss of $69 million or $3.43 per share. But full-year results adjusted for these significant non run rate and predominantly noncash charges would have reflected net income of $63 million or $3.09 per diluted share. A reconciliation to the GAAP reported income and EPS numbers is shown with the financial statements of our news release issued last night.

For the fourth quarter, we estimate EPS adjusted for non run rate items would have been approximately $0.83 per share assuming a 45% tax rate. As a reminder, we have approximately $900 million of tax attributes, primarily net operating loss carryforwards, which can be applied against pretax US income. As a result, our cash income tax obligations are minimal, relating primarily to state income taxes and our operations outside the US.

In 2008, the effective tax rate was 25% due to several accounting adjustments in the fourth quarter. However, the cash income tax payments in 2008 were approximately $6 million. We anticipate the effective income tax rate in 2009 will be approximately 40%, while the cash income tax rate will be in the mid single digits.

I want to take a moment to walk through several significant non run rate charges reported for the year as shown on slide 8. On a consolidated basis, non run rate charges for the fourth quarter and full year 2008 were $192 million and $207 million respectively. We previously announced the majority of these items in our news release on January 15th, 2009. These items related to the following. First, the mark to market losses of $87 million for the year were primarily due to an unprecedented and precipitous drop in metal prices. Second, a $66 million [lower of cost or market charge] to reduce our inventory value was also due to the drop in metal prices. You may recall that our inventory, which we value on a LIFO basis, had carried relatively high values due to applying fresh start accounting in 2006. Third, we took a $38 million charge to impair our 49% equity investment in Anglesey due to its inability to obtain an economically viable power contract and the resulting planned curtailment of smelting operations next September. Additionally, we recognized a $9 million restructuring charge related to our previously announced shutdown of our Tulsa, Oklahoma facility and reductions at our Bellwood, Virginia facility, both of which actions were taken to adjust our production to anticipated demand levels. Finally, we had several noncash non run rate items that totaled $7 million as described in the footnote on slide 8. As a reminder, while important to mention, these non run rate charges are predominantly noncash, and we believe they do not reflect the true underlying operating performance of the company. As we move on to our discussion of fabricated products and primary aluminum results for the fourth quarter and full year 2008 the presentation will focus on operating performance of the business segments excluding these non run rate items.

Slide 9 focuses on the fabricated products results. In the fourth quarter, our aerospace and high strength business remains strong with shipments approximately 20% above those of the fourth quarter in 2007. However, we saw a 9% reduction in total volume driven by a decline in end user demand for ground transportation and industrial applications that was magnified by distributor destocking. For the full year, fabricated products had strong financial results, generating operating income of $142 million excluding non run rate items. This was the second highest operating income in our history. This strong financial performance reflected record shipments of heat treat plate products, with 2008 heat treat plate shipments up approximately 5% over 2007, due in part to the completion of the final phase of our Trentwood expansion in the fourth quarter of last year.

Relative to 2007, we experienced favorable value-added sales of $25 million. However, this impact was more than offset by higher costs. We had a $24 million unfavorable impact from manufacturing inefficiencies, primarily resulting from planned interruptions as we made significant upgrades at several of our facilities and ramped up strategic investment and product development initiatives, particularly related to our heat treat plate at Trentwood. Although these investments caused short-term inefficiencies in our operations, we expect to realize significant long-term benefits from these investments.

Another source of manufacturing inefficiency in 2008 was the effect of lower volumes, particularly in the fourth quarter as the sudden drop in demand challenged our ability to immediately flex operations in line with market conditions. We took actions to reduce production by announcing the shutdown of our Tulsa, Oklahoma facility and the reductions at our Bellwood, Virginia facility, the benefit of which should be reflected in 2009. Finally, in 2008, we absorbed $17 million in higher energy, freight, and unfavorable currency costs, and we incurred $5 million more on major maintenance and depreciation expense. But despite the higher costs in 2008, the full year underlying results were the second best in our history.

Slide 10 introduces our sales analysis by end market application. Given investors' need for more information to better understand results in today's market, we are introducing this slide showing volumes and value-added revenue by end use category to provide greater transparency to the underlying financial performance of our business. As a manufacturer of fabricated aluminum products, we manage our business to significantly neutralize changes in underlying aluminum prices. We consider value added revenue, which is our revenue less the hedged cost of alloy to metal, to be an important performance metric for our business. This information is shown for all prior quarters from 2006 through 2008 in the appendix on slides 28 and 29.

During the year, we brought additional heat treat plate capacity online at our Trentwood facility which, along with robust demand for all our aerospace and high strength products, led to record shipments and value added revenue of the aerospace and high-strength category in the fourth quarter and the full year of 2008. Despite weak fourth quarter ground transportation and industrial demand, and heavy stocking throughout the entire supply chain, we reported strong general engineering shipments and value added revenue for the full year.

The end to market application all other is comprised of auto, custom industrial, cast, and billet, and represents approximately 15% of value added revenue. As you can see from the slide, these areas were down in both shipments and value added revenue from the prior year, most of which was driven by the rapid slowdown in the fourth quarter of 2008. Jack will talk in a little bit about what we expect for each of these categories in 2009.

Primary aluminum results are shown on slide 11. As previously announced, on January 14th last month, we expect that Anglesey will fully curtail smelting operations at the end of September 2009, when the existing power contract expires. As a result of the planned curtailment and the expected cash requirements for related shutdown costs, redundancy, and pension payments, which became determinable in the fourth quarter, we took a $38 million noncash charge to fully impair our 49% equity investment in Anglesey. During 2009, we do not expect to recognize our share of the operating results in Anglesey unless we can determine that those results will be recoverable through receipt of dividends. Also, the company has no requirement to make future cash investments in Anglesey. As we have reiterated many times in the past, we consider Anglesey to be a noncore business. The closure of Anglesey eliminates the convenient natural hedge that we had against some of the firm priced volume commitments in our fabricated products segment. However, going forward, we will simply continue our longstanding practice of hedging our fabricated products' firm price commitments with outside parties. As a reminder, primary aluminum segment includes our third-party sales of aluminum that we purchase from Anglesey as well as our primary aluminum hedging related activities, both of which will continue to be reported in the 2009 segment results.

On slide 12, we discuss our 2008 cash flows. We began the year with approximately $69 million in cash. We generated significant cash from operations during 2008, shown here as $130 million of EBITDA. Additionally, we began to access our $265 million revolving credit facility in the second half of 2008, with $36 million borrowed as of year end. In 2008, we deployed our cash to achieve several significant objectives. First, we invested $86 million in capital spending projects, primarily to fund the completion of the expansion at Trentwood, the new state of the art extrusion facility at Kalamazoo, and several upgrades at a number of our other facilities. The Kalamazoo facility remains a strategic project for us and it will deliver significant financial and operational benefits when it comes online in 2010.

We consumed $67 million of cash during the year to fund working capital. Much of this went to build inventory to ensure that we met customer demand while key manufacturing equipment at several of our facilities was offline for significant upgrades in the last part of the year. These upgrades will improve the long-term competitiveness of our business both in terms of quality and cost. And finally, we returned $45 million to our shareholders in dividends and share repurchases.

Turning to slide 13, our balance sheet remains strong and provides us a competitive advantage in this market. Operating cash flows are solid and we continue to maintain a prudent liquidity cushion to manage through the recession and ensure flexibility to capitalize on market opportunities should credit concerns diminish. As of year end, we had $36 million borrowed under our $265 million revolving credit facility, but as of the end of January, outstanding borrowings had reduced to $11 million, reflecting our focus on right-sizing working capital, particularly inventory, in line with lower, slower business conditions. The committed revolver facility matures in July of 2011. As previously announced in January, we amended our credit facility to enable continued payment of the quarterly dividends. The revolver previously had permitted dividends using a GAAP net income test, which has now been replaced with the revolver availability test that is more appropriate for the company. The amendment also requires to us seek approval from lenders for any future share repurchases.

Operating cash flow is expected to remain solid through 2009, assuming no significant deterioration in economic conditions. We anticipate capital expenditures will be approximately $45 million to $55 million in 2009, primarily related to completion of our strategic investment in the Kalamazoo project. We will continue to evaluate investment opportunities and allocation of capital with priority given to those projects that will create greater efficiencies and enhance operating cost performance.

We maintain a thorough review of our customer credit risk and exposure to that risk. To date, our DSOs on receivables remain consistent with historical trends. We will continue, though, to monitor our accounts receivable and other financial exposures with increased focus on certain industries in light of these challenging financial markets and economic conditions. As a reminder, our exposure to the automotive industry represents less than 10% of consolidated revenues. And now I will ask Jack to provide additional comments on the market and the outlook for 2009.

Thanks, Dan. Slide 15 provides context for a discussion of our outlook. Although the global economic environment remains challenging, our outlook is largely unchanged from what we described during the third quarter earnings call. The long-term fundamentals for aerospace and defense are good. Boeing and Airbus retain substantial backlogs, and while they are not impervious to a global recession, the long-term prospects for commercial aerospace are positive. Kaiser is also a well positioned supplier to the defense industry for aerospace and armor applications. As indicated in prior calls, we expect a modest decline in armor plate demand from the 2008 peak. However, we have reasonable visibility to anticipate that overall demand for our portfolio of aerospace and defense products will continue to be robust.

The short-term outlook for ground transportation and industrial applications is less encouraging. Industrial production continues to slow, and the ground transportation sectors have been severely impacted by the current recession. Destocking continues throughout the entire supply chain, and we have limited visibility regarding the true underlying demand for these applications. We expect that the weak demand will continue at least through the first quarter of 2009. However, at some point, destocking will run its course and our demand will improve compared to current levels even if the end markets remain weak.

So what does this mean for our first quarter outlook? We expect that aerospace and high strength shipments will be similar to the record levels set in the fourth quarter last year, while shipments for other applications will be lower than the fourth quarter as a result of continued destocking and very soft end use demand as I mentioned earlier. We expect that value added revenue per pound will be similar to the fourth quarter of 2008 as a richer mix offsets some of the downward pressure on prices. We expect continuing manufacturing inefficiency in the first quarter as we adjust resources to the sharp decline in business levels. However, we expect that energy costs will improve approximately $2 million and major maintenance costs will improve approximately $3 million in the first quarter compared to the fourth quarter, and we will not incur the $2 million of extraordinary cost impact to Trentwood related to a severe snowstorm in December.

Turning to slide 16, we believe that Kaiser is well positioned to manage through these uncertain economic times. Our balance sheet is solid with essentially no debt, and we have liquidity and financial flexibility which provide a competitive edge in the current environment. Our focus on demanding applications and our unwavering commitment to be the supplier of choice are important enablers to achieve a strong and defensible competitive position. We have a growing aerospace and defense presence that is supported by multiyear commitments. In addition, we are positioning the company as a low-cost producer with our investments at Trentwood, Kalamazoo, and several other manufacturing facilities. This combination of attributes, a strong balance sheet, focus on demanding applications, differentiation of our products and services, and an improving cost position provide a strong financial and competitive foundation to manage through economic uncertainty. Even more, we are positioning the company to prosper upon the eventual economic rebound and to seize new opportunities for long-term growth as they arrive.

Slide 17 outlines our focus for 2009. Dan and I have both emphasized the manufacturing inefficiencies that we endured in 2008. During the first quarter of 2009, we will wrap up the remaining strategic capital and product development initiatives that were a source of inefficiency last year. In addition, we will continue to align our production and our resources with lower demand. Our primary focus this year is to regain manufacturing efficiency. We expect to reduce fabricated products inventory by $20 million by midyear, and to achieve underlying cost performance equal to or better than the record 2007 baseline during the second half of this year.

Beyond this tactical focus, we will continue to position the company for strategic income growth. We plan to launch a portfolio of Kaiser select plate products in 2009, and we have expanded our global aerospace and defense effort with recent high-level additions to our European sales and engineering organization. Looking ahead to 2010, we continue on a track to launch our world-class Kalamazoo facility.

Slide 18 summarizes today's prepared remarks. We had strong underlying results for 2008, with the company's second best ever fabricated product operating income. We believe Kaiser is well positioned with financial and competitive strength to manage through ongoing economic uncertainty. Our focus in 2009 is to preserve our financial strength and to prioritize tactical and strategic initiatives on opportunities to generate manufacturing efficiencies and profitable long-term sales growth. We will now open the call for questions.

Thank you, sir. (Operator Instructions). We'll go first to Timna Tanners with UBS.

Hi, good morning.

Good morning, Timna.

Thanks for the additional detail. I always appreciate it. There's a lot of detail in the call, so apologies if I'm asking to you confirm some stuff that you already alluded to, but wanted to nail down a few things on the cost side. What lingering costs might you have related to the Tulsa and Bellwood moves, or are those pretty much behind us?

We took -- we took reserves for the downsizing of those facilities in the fourth quarter, but we'll have some continuing costs here in the first quarter as we implement that manufacturing [inefficiencies] and rebalancing throughout the system. But we think most of that will be wrapped up in the first quarter.

So when you refer to first quarter continuing manufacturing inefficiencies, that's the kind of thing that you are referring to that could linger for a quarter or so?

Yes, that's a component, but we're still continuing the Chandler start-up. I think they pushed their first billet in late January. Sherman is upgrading their 2,500 ton. The 4,000 ton press at Los Angeles started late in the year and is still ramping up. We have a few items where we're refining the system and getting launched. So it is a combination of strategic projects and the continued downsizing of our operations, because we will have lower volume in the first quarter than the fourth quarter.

But are there a lot of economies of scale when you have pretty high variable costs? How do we think about that?

Well, there's a lag in us, especially when the decline in volume is as precipitous as it has been in this recession. There's a lag in getting those costs out, and that's why we expect we'll have efficiencies through the first -- inefficiencies through the first quarter and perhaps into the second quarter. Really a function of when the destocking wraps up and when demand actually stabilizes. That's why we were saying that by the second half of the year we expect that we're going to see significant improvements in our efficiency, but it's difficult to predict exactly when that will happen.

Okay. So you are a high variable cost company -- however, given the precipitous decline in volume it doesn't happen on a dime. It takes a while to adjust.

Exactly.

Switching to your balance sheet, trying to think about cash going forward, how flexible is CapEx? Could you, if you needed to, put off or delay the Kalamazoo project, which seems to be the biggest source of CapEx? How much is your maintenance versus growth CapEx?

Maintenance CapEx as we've said in the past is somewhere in the $12 million to $15 million per year range. Most of the spending this year is Kalamazoo, as you would suspect. We reviewed that multiple times in the past two or three months, and the answer always comes out the same, that that's a very good project that we should pursue. So could we stop it? Yes, we could stop a portion of that spending, but we don't intend to. That's a good project -- a high priority project and we intend to fund it.

So then switching to thinking about the competitive landscape right now, your key competitors are Alcoa and former Alcan operations, then you've got Aleris. With some of the distressed smaller mom and pops and with Aleris being in bankruptcy, how is that affecting and perhaps your M&A opportunities?

We'll continue to look for complementary acquisitions that add a value for the company. It's too early for us to see those at this point, but we would suspect if this economic distress continues that there could be some opportunities on the horizon.

How high of a priority is that for you, and are you seeing any changes in the market behavior given some more distressed kind of competitors?

You mean market behavior in terms of -- ?

Price undercutting, pricing, or in terms of opportunities to take market share because of less focus on customers, et cetera.

I've stated before that when we went through the last recession, that we didn't see as much price cutting as we may have seen in prior recessions, particularly as it relates to the extrusion end of the business. However, in general engineering plate, the pricing was pretty severe in the last recession. At this point, we've not seen a lot of price erosion, although there is price pressure. Some of that has been helped by the precipitous decline in metal. So while prices in total have declined, a big portion of that has just been the metal. So it at this point, we've not seen significant distress in pricing, but in this environment, there's always some pressure on pricing.

I will leave with it that last question. Still hoping for a little more detail on how you might look at M&A -- how big of a [parity] it is for you, what size, what size borrowing you think you might consider if you were to go with that route?

I don't think we want to go there at this point. I mean, the capital markets still are basically frozen. So we continue to monitor the capital markets, and we continue to monitor what's happening in terms of acquisitions. Our first priority would be some of the smaller bolt-ons, and we mentioned, I believe, on the last call that we were very close on more than one of those at year end. We continue to monitor those situations, and there could be some bigger ones that come along, and we'll evaluate those on a case-by-case basis.

Thanks a lot.

And we'll take our next question from Tony Rizzuto with Dahlman Rose.

Thanks very much. Hi, everybody.

Hi, Tony. I also concur on that.

I thank you so much for the additional disclosure. Very good to see. I've got several questions here. First, I wanted to make sure I heard correctly. Did you guys include in the primary aluminum results that there was a $10 million insurance settlement in there?

Yes, there was $10 million received in the fourth quarter. We'll anticipate the rest of it to come some time in 2009. But it's important to remember that that goes -- primarily it goes to Anglesey. So the cash impact to us would depend on the dividends being paid to the partners.

Just to refresh my memory, what was the rest of the amount? Total about $40 million, somewhere along those lines?

In terms of dollars and our share, it's not that much. It's probably about $20 million, maybe a little more than that total for our share.

Okay. So you have received $10 million, another $10 million will be coming over the 2009 periods?

Again, Anglesey has.

Thank you, with the 49%. My next question is, you are talking about the heat treat, or the high strength and aero shipments in the first quarter being similar to fourth quarter levels. And when I look at the industry order patterns, and they just seem to be falling off a cliff, it's just amazing to watch this develop. How comfortable are you? Are you that comfortable in making the statement because of the contracts you have at this point, or do you see any possibility of maybe some further slippage there, Jack?

Tony, we're pretty confident and have very good visibility for the first quarter. So to be at a level similar to the fourth quarter, we have a high degree of confidence of that at this point. And we've not seen tremendous pressure. Is a lot of that a function of our contract positions? Yes, it is. And a lot of it is a function of us being the supplier of choice in some of those categories where we do not have underlying contracts. So it's a combination of factors.

Now, in light of this, obviously the general engineering, industrial applications, automotive, all falling quite sharply -- where are you guys, if could you separate or keep everything else remaining the same, where would you be in terms of your expansion and modernization at Trentwood in relation to where you are today, in terms of what you are operating at and realizing in terms of shipment volumes?

Trentwood in the fourth quarter -- just the heat treat plate is what you are talking about -- Trentwood in the fourth quarter had the second best shipments. It was near record heat treat plate shipments, virtually the same as the second quarter, which was the record in 2008. Their total heat treat plate volume in the first quarter right now looks like it will be similar to the pace that we were running last year, which will you recall we were calling it back then roughly in the low 80s in terms of capacity utilization of the ultimate capacity, which we now have installed at Trentwood. So that remains relatively strong. The big wildcard here is general engineering plate, and -- which goes primarily to service centers, and that market is very depressed, as are all service center markets. So the big wildcard is general engineering, but again we think the destocking will run its course at some point. I don't know when that point is for general engineering plate, and we'll be running at good -- reasonably good capacity utilization.

All right. So I just want to make sure I understand correctly, because some of the heat treat material does go to non-aero applications. And if you're operating the heat treat plate, which I would imagine -- or maybe you were referring to the aero applications, in the low 80s? If the combination of what goes to the aero and high strength area as well as general engineering -- if you look at both segments combined, would it still be that low 80s type operating rate?

Yes, my comment was total heat treat plate in the fourth quarter. Aerospace and general engineering, combined, ran at basically the same level we've been running all year. And that's in spite of a significant downturn in general engineering demand. And that's because a lot of the increased aerospace and heat treat was actually heat treat plate in the fourth quarter.

Okay. Can you give us a little bit of guidance in terms of -- obviously looking at the order pattern, shipments have been now less than the order patterns this year, but should we gauge our models in looking at the non aero business for you as that volume declines when we look sequentially?

I'm not sure exactly what to tell you about what to expect, because we don't know what to expect. Our visibility is days, not even weeks or months, in terms of that visibility. All I can tell you right now is we expect that the first quarter is going to be down from the fourth quarter, and the fourth quarter was down substantially from prior quarters, as you'll see when you get a chance to look at some of those quarterly trends that we've put in the appendix. So in terms of modeling it, frankly, Tony, we don't know where this is going, but -- and it's the wildcard, as I mentioned in my remarks, it's not only destocking at the service centers, and we have some visibility of that, particularly for rod and bar, but it's the destocking through the entire value stream. So service centers are seeing destocking by the OEMs, and then the service centers are destocking in addition to that. And so for us to gauge what real demand is, is virtually impossible at this point.

I mean, for example, in January, we have statistics for rod and bar for service centers. In the fourth quarter, service center shipments of rod and bar were down 17% year-over-year, but mill shipments to the service centers were down 38% as a consequence of the destocking. So service center demand down 17%, mill demand down 38%. In January, we just got those statistics -- in fact, I just got them this morning -- rod and bar service center shipments were down 35% year-over-year and mill shipments to the service centers were down 40%. So that's just how dramatic this is, and again, going back to the service centers, they're down 35%, but that's more than the demand in -- real demand decline because their customers are destocking as well. So how do we judge this? I don't know how to judge it, Tony. We'll just to have wait a few months for this to sort out.

That's great insight. I just got a couple more questions. In terms of the corporate expenses, I noticed they came in about $9 million. We had been modeling a little higher level. Was the order level sustainable, gentlemen?

Yes, for the fourth quarter, that was down, because of some adjustments we had. One of them was long-term and short-term incentive compensation that we had a true-up for in the fourth quarter. So it's probably -- that's not a level. The fourth quarter is not necessarily a level that you want to be hanging your hat on going forward.

Okay. So getting back to maybe $12 million to $13 million per quarter?

Probably. We're targeting something for the year in the territory, being down a couple million dollars, probably more than just $2 million to $4 million.

Excellent. And as far as depreciation, should we be using a similar level, or how does that change, looking at '09 versus '08?

Well, it will be up a little, because we've commissioned new pieces of equipment at Trentwood and a few other locations, so I don't think it's dramatic increase, but -- I wouldn't even -- more than just a couple million up in your model.

Very good. Working capital, you made some comments earlier about the -- that a lot of the working capital as a use of cash in '08 was clearly in preparation as you were doing the major expansion and various components. I would expect you are going to work awfully hard and really try to extract as much cash as possible. Should we assume that's going to be a source of cash '09, and possibly a fairly large one for you?

Well, absolutely. Jack mentioned we have a target of $20 million for inventory to -- of cash to be generated from reduction of inventory over the first half.

Okay, I'm sorry, didn't hear that.

Yes. And we also -- we've been making progress in the fourth quarter as well as currently. So I mentioned that our borrowings on the revolver were down from $36 million at year end down to $11 million at January month end, so that was in part as we've been working towards that rightsizing of working capital.

Excellent. Keep up the great work.

Thanks.

And we'll take our next question from Tim Hayes with Davenport & Company.

Hello, everyone.

Hi, Tim.

A few questions on the Kalamazoo and restructuring -- that side of the businesses. You had stated before that you expected $23 million of EBITDA from the restructuring. How good is that number, given how weak conditions are? And what would be the timing of the -- of the EBITDA/savings that you expect to get from Kalamazoo and the restructuring?

We would -- those same order of magnitude benefits at steady state volume, not at recessionary volumes. And when we get the plant fully operational, which will be sometime during the first half of next year, we should be at a fully operational pace. And then what the demand will be at that time, no one knows. But it still has that value going forward on a steady state basis.

Okay. And then the weather impact, how much impact was there to the shipments from the -- ?

Virtually none. The $2 million is all cost related, about $1 million worth of snow removal and $1 million worth of lost production at Trentwood during the month. Order of magnitude.

And then finally, on the working capital, was that a source -- did that actually generate cash in Q4 of '08?

Yes.

Okay. That is all I have. Thank you.

Thanks, Tim.

(Operator Instructions). And we'll take our next question from Mark Parr with Keybanc Capital Markets.

This is Phil for Mark. How is everyone?

Good, Phil.

I just have a couple questions. As far as the hedged metal pricing, that implied number that we backed into from the value added, when would you expect that to get to more market normalized levels given the fact that the market corrected so dramatically so fast? Meaning when do your input costs as far as they flow through the P&L get to where they currently are on the LME?

The biggest factor that would make market pricing be different from what is essentially the hedge to metal that you backed into is really the hedging with the contracts that we have. So we put those in place in many cases several -- a year or so ago at higher metal prices, and many of those will carry on for a couple of years into the future. So that's why we wanted to make sure we identified that it's hedged metal that's alloyed, not just spot metal.

Okay. Great. So that hedged metal level that was arrived in the fourth quarter, should we expect it to continue foreseeably?

Well, it will probably, over time, as some of the contracts that are at higher metal prices fall off, then will you be seeing an impact of what the then current metal prices would be as part of the spot increases and the contract pricing falls off with the contract pricing being locked in at the higher metal prices of a year ago.

Jack, in the aerospace and high strength supply chain, can you give us a feel for that right now, given the fact that -- I know stuff like monolithic heat treat plate is different from titanium applications for airframe, which there's a wide excess of inventory at the subcontractor level for that stuff. How does the supply chain feel right now for you as far as visibility there?

Well, there is some excess of inventory in the system. Part of that goes back a couple years with the A380 delays. So Airbus is still working off some of those inventories, then Boeing has the situation with the 787 that has a much bigger impact on titanium than it does it on the aluminum side, and then there was the strike in the fourth quarter at Boeing. So they've had some inventory buildup as well. But I come back to say that in terms of our visibility, we've got pretty good visibility for this year. We know that they will be looking to work those off, but it's not working them off over a matter of weeks. It's a matter of months and years as we see it.

Okay. And then my last question is, Dan, on the other current assets, it looks like there was about a $70 million increase sequentially. What's baked in there?

That includes -- actually, there will be several places on the balance sheet where you'll see the impact of this. But when you do the marked to market of our hedging positions, a significant piece is in the current assets, but also in the longer term assets. And also long-term liabilities, you will see a similar impact there. So is it happens in actually I think four places on the balance sheet where the mark to market of our derivative positions appears.

Thanks. Have a good afternoon.

And we'll take a follow-up question from Tony Rizzuto with Dahlman Rose.

Thank you so much. Follow-up question regarding Boeing, and what would the impact, Jack, be if we were to see production curtailments from them on the single aisle aircraft? How would that affect you guys?

Well, would it have some effect, and we're not going to go into the specifics regarding our contracts by customer. But many people know that we follow Airline Monitor. Airline Monitor just came out with a forecast, and where their previous forecast had no downturn in builds for Airbus and Boeing, they're now predicting a downturn of 10% in the build rate in 2010. But if you put that in context and look at the prior recession, the bottom was down 30%, and it was basically at that level for four years from 2001 through 2004. So would a Boeing downturn have an impact? Eventually it would have some impact on us, but again, we've got some contracts and some that's not protected by contracts in our total mix in terms of aerospace. But at this point, we think those backlogs are very strong and we don't see a significant impact, even if there is a downturn, a modest downturn of 10% or so. Certainly it will be an impact, but nothing like we've seen from prior cycles.

Thank you, Jack.

And Mr. Hockema, I will turn the call back over to you for any additional or closing remarks.

Thanks. Just turn to slide 20 here, and I will reiterate a couple of the important points from the call. First being that our underlying results were very strong and our long-term business fundamentals remain positive. We believe that we're well positioned with financial competitive strength to manage through these challenging times and the current market cycle. Thanks for joining us today, and we look forward to updating you again on our first quarter call in three months.

And that does conclude the call. Thank you very much.