Kaiser Aluminum Corp (KALU) 2011 Q4 法說會逐字稿

Good day, and welcome to the Kaiser Aluminum fourth-quarter 2011 conference call. At this time, I would like to turn the conference over to Ms. Melinda Ellsworth. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's fourth-quarter and full-year 2011 earnings conference call. If you have not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We've also posted a PDF version of the slide presentation for this call. Joining me on the call today are our Chairman, President, and Chief Executive Officer, Jack Hockema; Senior Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neil West.

Before we begin, I would like to refer you to the first two slides of our presentation. I remind you that the statements made by Management, and the information contained in this presentation that constitute forward-looking statements are based on Management's current expectations. For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the Company's earnings release and reports filed with the Securities and Exchange Commission, including the Company's Form 10-K for the full year ended December 31, 2010. These factors include, among others, the completion of the audit of the financial statements as of, and for the year ended, December 31, 2011, and the completion of the valuation of post-retirement obligations of the VEBA. The Company undertakes no duty to update any forward-looking statements, to conform the statements' actual results, or changes in the Company's expectations. In addition, we've included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP measures are included in the earnings release and in the appendix of the presentation. At the conclusion of the Company's presentation, we will open the call for questions. I would now like to turn the call over to Jack Hockema. Jack?

Thanks, Melinda, and welcome to everyone joining us on the call today. We're pleased with solid year-over-year improvement and strong 2011 results. Adjusted EBITDA and earnings per share increased 31% and 41% respectively, over 2010, driven by record value-added revenue for our aerospace and automotive applications, and strong performance from our acquisitions of the Alexco and Nichols Wire businesses. During the year, we also made several investments in our growth platform. We commenced capacity expansions at our Alexco facility and at our Trentwood rolling mill to meet the growing demand for aerospace extrusions and heat treat plate applications. In addition, we made good progress in the production ramp-up at our Kalamazoo rod and bar facility, with product quality exceeding all expectations. Although the production ramp-up has been slower than anticipated, this world class facility is positioned to be a low-cost producer for general engineering applications, and is expected to fully achieve its investment potential over the longer term.

During the year, we amended our revolving credit facility to increase the lending commitment, and extend the maturity to September, 2016. This action bolstered our liquidity position and provides us with greater flexibility to pursue organic and acquisition growth opportunities. And lastly, we continued our practice of returning cash to shareholders through our quarterly dividend payment, and we recently announced a 4% increase in the quarterly dividend. This increase reflects our confidence in the Company's financial strength, and excellent long-term earnings potential. In 2012, we expect our momentum from 2011 to continue, with very strong aerospace demand, and steady improvement in automotive and general industrial demand. We're well positioned to capitalize on this demand growth with investments made in prior years, and with additional capacity being installed for aerospace applications. We anticipate that higher sales volume, combined with improving manufacturing efficiencies, will continue to drive our EBITDA margin improvement trend. In addition, we anticipate capital spending of approximately $50 million in 2012 for projects that will expand our capacity, and further enhance product quality and manufacturing efficiency. I'll now turn the call over to Dan to discuss details of the fourth-quarter and the full-year 2011 results, and then I'll provide some additional comments regarding the near-term outlook for the first half of 2012. Dan?

Thanks, Jack. Slide 7 shows the quarterly and annual trends in value-added revenue. As a reminder, value-added revenue is net sales, minus the hedged cost of alloyed metal. The fourth quarter 2011 marks the fifth consecutive quarter of improvement in total value-added revenue, and value-added revenue per pound, reflecting improving overall demand, and a gradually richer mix throughout 2011. Significant improvement is especially notable on a year-over-year basis, with total value-added revenue improving 25% in the fourth quarter, and 16% for the full year 2011. Focusing on end-market applications, aerospace and high-strength value-added revenue increased sequentially 8% in the fourth quarter, and consistent with our expectations, improved approximately 13% in the second half of the year, compared to the first half on stronger demand. The continued strength of the aerospace and high-strength end-market applications, as well as the impact of our recent acquisitions, is further demonstrated by year-over-year value-added revenue improvements of 41% for the quarter, and 28% for the full year.

Value-added revenue for automotive extrusions reflected normal year-end seasonality in the fourth quarter, with an 11% sequential decline, and was flat with prior-year fourth quarter. However, for the full year of 2011, value-added revenue increased 13% on higher light-vehicle build rates, and the continued ramp-up of new automotive aluminum extrusion programs. Value-added revenue for general engineering products in the fourth quarter was comparable to the third quarter, and up 5% compared to the prior-year quarter. General engineering value-added revenue for the full year of 2011 was essentially flat with the prior year, 2010. Further detail on value-added revenue by sales application can be found in the appendix on slides 22 and 23. Slide 8 shows adjusted consolidated EBITDA. Fourth-quarter 2011 adjusted-consolidated EBITDA of $30 million reflected a slight improvement over the third quarter, and a 92% improvement over the fourth quarter of 2010. For the full year of 2011, adjusted consolidated EBITDA improved 31% to $112 million.

Our adjusted consolidated EBITDA margin as a percentage of value-added revenue was 18.2% in the fourth quarter, and 17.3% for the full year, both notable improvements over the comparable 2010 periods. Year-over-year, adjusted consolidated EBITDA and margin improvements, for both the fourth quarter and the full year, reflected stronger demand in shipments across all end-use categories. Slide 9 shows consolidated cash flow for the year of 2011. After funding the Alexco transaction in early January, adjusted consolidated EBITDA of $112 million funded all remaining cash requirements for the year. The increase in working capital supported the growth in our operating activity, as our end markets continued to improve. Capital spending was $31 million for the year. As Jack previously indicated, we expect capital spending in 2012 will be in the range of $50 million, as we proceed with the Trentwood plate expansion that we announced in August, complete the Alexco expansion, and fund other projects focused on capacity, quality, and efficiency. Financing cash outflows included interest and miscellaneous principal payments on our debt, and of course dividends, which as Jack mentioned earlier, we increased by 4% to $0.25 per share per quarter, as of the first quarter of 2012. Total liquidity at December 31, 2011 was approximately $300 million, including cash of $50 million, and more than $250 million of borrowing availability under our amended revolving credit facility.

On Slide 10, we show key consolidated financial metrics. We are reporting preliminary unaudited results today. Final audited results are subject to change, pending the final actuarial valuation of the accumulated post-retirement obligation of the union VEBA, due to additional information received from the VEBA administrators. If the final valuation differs materially from the preliminary-2011 or reported-2010 financial statements, we may have adjustments affecting one or both years. VEBA related income or expense is non-cash, and considered a non-runrate item.

So any VEBA related change in income will have no impact to adjusted for non-runrate items, operating income, EBITDA, net income, or EPS. Only reported GAAP income measures could be affected. Consolidated operating income, as reported, of $16 million in the fourth quarter and $58 million for the full year both reflected unfavorable non-runrate items. Most significant in 2011 for the full year was a $27 million non-runrate cash mark-to-market loss, and non-cash loss on metal hedging positions. Details for non-runrate adjustments to operating income are shown in the appendix on slides 24 and 25. Consolidated fourth-quarter operating income, adjusted for non-runrate items was $24 million, up slightly on a sequential basis, and more than double that of the fourth quarter 2010. For the full year 2011, consolidated adjusted operating income of $86 million reflects an increase of 33% compared to the full year 2010, again reflecting stronger demand in shipments across all end-market categories. Reported net income for the fourth quarter was $6 million, or earnings per diluted share of $0.34.

Adjusting for non-runrate items, fourth-quarter net income was $10 million, or adjusted earnings per diluted share of $0.52. For the full year, reported net income was $27 million, or earnings per diluted share of $1.40. Adjusting for non-runrate items, 2011 net income was $42 million, or adjusted earnings per diluted share of $2.20. Our effective tax rate for the full year of 2011 was approximately 40%, comparable to the rate for the full year of 2010. On a quarterly basis, our effective tax rate can vary significantly due to a variety of factors. You may recall that our third-quarter effective tax rate was 14%, reflecting the release of a tax reserve related to a prior-year tax position. In the fourth quarter, our effective tax rate was 53%, reflecting a true-up of state tax NOL positions, and the acceleration of non-tax deductible compensation expenses that would have otherwise been reflected in future periods. Our net operating-loss carry-forwards of $875 million at December, 2011, combined with other tax attributes, are expected to result in a cash tax rate in the low single-digit percentages.

Moving to slide 11, I would like to review once again our relationship with the VEBA trusts to appropriately frame any pending VEBA related changes to current- or prior-year financial statements. Most importantly, our financial obligation to the VEBAs is to make a defined, but variable, contribution based on an annual pre-tax cash flow calculation, primarily determined by our consolidated EBITDA, less capital spending and cash interest expense. The variable contribution can range from a minimum of $0 to a maximum of $20 million in any given year, and for the year ended 2011, our variable contribution is $0, as capital spending, including cash paid for Alexco, and cash interest expense exceeded EBITDA. Neither the funding status of the VEBAs, nor our accounting treatment of the VEBAs can influence our variable contribution in any way. Accordingly, any VEBA-related change to prior year financials will not change our variable VEBA contributions paid in prior years or the current year. Kaiser has no claim to or control over the VEBA assets, and we do not determine, pay, or manage the VEBA's benefit obligations.

The VEBAs are trusts, separate from Kaiser, that are independently managed through third-party administrators to provide medical benefits for certain of our current and future retirees. Nevertheless, for accounting purposes, Kaiser is required to report the VEBA assets and obligations in our financial statements as if they were defined benefit plans. To develop appropriate assumptions for defined benefit accounting annually, we must obtain information from the VEBA administrators regarding the VEBA assets, benefit levels, participant populations, and coverage elections. As a result of additional information about the VEBA selections by our participants -- by the participants that we recently received, we are still in the process of valuing the union VEBA's current- and prior-year benefit obligations. This could result in changes to our financial statements for the current or prior year, or both.

Any VEBA related change in reported income, however, will be a non-cash expense or gain that, consistent with our prior practice, will be treated as a non-runrate item. Therefore, it's important to note that our consolidated operating income, EBITDA, net income, and EPS, adjusted for non-runrate items, will remain the same, notwithstanding any potential VEBA-related income change. So to summarize, our financial obligation to the VEBAs is a variable cash contribution that is not affected by either the funding status of the VEBAs, or our accounting for the VEBAs, and our non-runrate income measures remain the same, even if there are VEBA-related changes to our financial statements. And now I'll turn the call back over to Jack to discuss current industry trends and our outlook. Jack?

Thanks, Dan. Turning to slide 12, we continue to expect robust long-term aerospace demand growth for our products, driven by steadily increasing build rates, larger air frames, and continued conversion to monolithic design. New air frame orders booked by Boeing and Airbus in 2011 were the second highest ever, resulting in a backlog of more than eight years. Airline Monitor has published their updated forecast for airframe builds, and the already robust forecast has been increased by approximately 2% for builds anticipated during the remainder of the decade. With the breadth of our aerospace product offering, and our investments to expand capacity, we are well positioned to capitalize on this very favorable outlook for the industry. In the first half of 2012, we anticipate that growing value-added revenue for these aerospace applications will be driven by continued aerospace demand strength.

Turning to slide 13, our value-added revenue for custom automotive extrusions was at a record level in 2012 as a result of higher build rates and record Kaiser value-added revenue content per vehicle. We anticipate continuing automotive sales growth in 2012, and remain especially bullish regarding the opportunities for automotive custom extrusion applications. As build rates continue to increase, and CAFE standards drive increasing aluminum extrusion content, we expect that this upward trend will continue for several years. Demand for general engineering applications continues to reflect a slow, but steady recovery in the general industrial economy, and service-center inventories remain at historic low levels. When the industrially economic recovery eventually gains sufficient strength and consistency to foster customer confidence, we expect to benefit from restocking. For the first half of 2012, we anticipate normal seasonal strength, and a continuation of steadily improving demand for auto and general engineering applications. Turning to slide 14 and our near-term outlook, we expect that total value-added revenue in the first half of 2012 will be up 10% to 15% compared to the first half of 2011, driven by stronger aerospace and automotive demand, and by first-half seasonal strength across our end-use applications. We also anticipate continued improvement in EBITDA and EBITDA margin, driven primarily by higher sales volume and improving manufacturing efficiencies, and we have the potential for adjusted EBITDA margin approaching the record 20% level, previously achieved in 2007.

Summarizing our remarks for today, our full-year 2011 results reflected record value-added revenue for our aerospace and custom automotive applications, and solid performance from our Alexco and Nichols Wire acquired businesses. We ended the year with strong momentum, and expect it to continue into 2012. Longer term, we're very well positioned in attractive growing aerospace and automotive markets, with stronger demand, and the benefit from our organic investments and acquisitions yet to be fully realized, we believe we have excellent long-term earnings potential. Further, as evidenced by the recently announced expansions of heat treat plate capacity at Trentwood, and aerospace extrusion capacity at Alexco, we have opportunities for additional growth. We expect these opportunities will support capital spending of $40 million to $50 million per year over the next few years, and in addition, we will continue to consider complimentary acquisitions. We will now open the call for questions.

(Operator Instructions) We'll take our first question from Phil Gibbs with KeyBanc Capital Markets.

Good morning, Jack, Dan, Melinda. The pricing in the fourth quarter, and in general, engineering, it's been, I would say, on the higher end of what we've seen in recent quarters. Is that due to price increases that you've been putting through? Does the market feel stronger about the price side? Have we moved off the bottom? How are you viewing that going forward?

There really hasn't been any change in pricing of consequence. Most of what you see in there would be mix related. But there also is a little impact from metal prices. Metal prices were a little lower in the fourth quarter, and not all of that got passed through in some of the higher value-added applications. So, there was a little bit of impact there. But most of it's mix related.

Okay, and on the expansions that you're doing at Alexco and at Trentwood, should we be thinking about any EBITDA contribution from those late this year, or should we really hold off until '13 to start thinking about that?

Well, the Alexco impact will start coming on during this year, and the Trentwood, really, is 2013 related, in terms of seeing any impact from that. But we expect to see good, steady growth in aerospace as we go forward.

Can you give us just a general idea about the way that you would look -- I know a lot of it would be dependent on mix, but your idea of utilizations at your aluminum aerospace extrusion business, and then also at Trentwood?

Well, in aerospace extrusions, we are running very strong, and relatively close to capacity there. And, again, we see good, strong growth there. We don't think we're losing orders, but we think that as the new capacity comes on, and as demand continues to build, that we'll get utilization of the new equipment coming on stream.

At Trentwood, we are on what we call managed order entry right now, and that's a function of two things. One is the very strong aerospace demand. But secondly, our capacity, frankly, is a little bit constrained, and will be as we go through 2011 here, and install the new capacity. So, we don't have the full capacity available to us in 2012, just because of the installations that are taking place there. So, demand is strong in both of those facilities, but we'll continue to open up capacity here, as the expansions come on stream, and remove some of the obstacles at Trentwood from the installations that are taking place during the year.

Have your heat treat aerospace-related shipments -- have those already surpassed the prior peak several years ago, or are --?

Yes.

They have?

Yes, by a considerable margin.

Okay, terrific. Thanks a lot.

Yes.

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

Hello, everyone. A few questions. On Trentwood, being near capacity or what not, does that imply that -- I mean, can volume still go up on your aerospace plate shipments out of Trentwood? Or to the extent that you're at capacity, might that growth be capped until that incremental capacity project is installed?

Go back to my first-half outlook, we said compared to year-over-year, we expect in total to be up 10% to 15%. And we expect our aerospace to be on the high end of that 10% to 15%, and the automotive and general engineering, the lower end of that 10% to 15%. So, despite having very strong demand, and getting close to quote capacity, and again, there are some temporary constraints that we have off-and-on during the year, at Trentwood in particular, we still have opportunities for growth there, and we expect -- we had record aerospace last year, even excluding the Alexco. So, even on a same-store basis, our aerospace value-added revenue was an all-time record, and we expect another all-time record this year.

Okay, and do you have a sense on your service center inventory level of aluminum plate, where they stand? Is that still a little heavy, or have those been brought in line?

We think that the aerospace inventory story is done, in terms of it being an overhang suppressing demand. We think inventories are in balance, and the entire focus, and it has been for almost a year now, is really on gearing up for the very, very ambitious build rates that Airbus and Boeing have.

Okay. And final question, on Kalamazoo, I know that didn't quite hit the EBITDA target last year. Where did that come in at for contribution to EBITDA in '11, and does that get to $15 million in '12, which I believe was the original, or a goal for '11?

It was in the single digits last year, as we said on the last couple of calls, and we just expect good, steady improvement. We're not putting any specific target on it for '12, but it rolls into that total EBITDA margin. We're expecting that the total volume improvements that we're seeing as a Company, as well as the steady manufacturing efficiencies that we're gaining, which in part is at Kalamazoo, but we also have potential at several other facilities to do a lot better than we did in 2011. We've got good potential to get to the kind of -- to the record EBITDA margin that we saw back in 2007. So, we're encouraged by the progress at Kalamazoo, just we were a little too optimistic in our forecasts 1 year ago, 1.5 years ago.

And I guess just to follow up on that, is that all the equipment and everything installed, in place, now it's just a matter of ramp-up volume, or are there some production issues that you're still --?

It's just continuing -- it's steady improvement in the up time and the reliability of the equipment.

Okay, thank you.

Reliability, in terms of operating consistently.

Thank you.

Yes.

We'll move next to Edward Marshall with Sidoti & Company.

Hello, guys. So, my first question is -- if I can hone in on the service center and general engineering, if I could for just a second. Have you seen any signs or any signals that could point to a potential restocking on the horizon? And more importantly, if I look back to fourth quarter, how much do you think just normal seasonal trends played into the quarter that you had, maybe working capital adjustments that the service centers look at? And also kind of the volatility that we saw in aluminum pricing, did that play into it, or was it something else?

It was typical, and it wasn't just service centers. We saw it in automotive, and even to some extent in aerospace, where volume got curtailed, especially late in the fourth quarter, and it will get shifted into the first quarter here, and that's normal. In terms of the restocking in the service centers, we've already gone through a couple of false starts in this cycle. In late '10, I think it was -- the chart is in the appendix in the book. But if you go look at the appendix, where we plot the rod and bar inventories, there was actually restocking for two or three quarters in late 2010, and I think maybe even the first quarter of 2011, but then we saw destocking again throughout the year. And it's just the fact that we have false starts, everybody's jumping up and down saying -- wow, the economy's getting stronger here. We've gone through two or three of those false starts, and just kind of an up and down, and we're still sitting with inventories at 2.1 or 2.2 months, in terms of the rod and bar inventory.

So, in the prepared remarks, my comment regarding restocking was -- we don't think we're going to see consistent restocking until we get good, steady confidence in the customer base that this recovery is for real, and has legs to it. And then that will start to push lead times out from the mills, and we'll get into all the normal dynamics that cause restocking. But we may see some temporary bursts. There seems to be a lot of enthusiasm out there right now, but I'm not putting much credibility into it -- one rose does not a garden make. We need to see a little more of this, and maybe we'll see some, a real recovery in the general industrial economy.

And Kalamazoo -- first, I guess you're probably not going to give me, but I'll ask utilization rate for that facility. But also, do you have any more additional dollars, other than, say, normal maintenance CapEx that you may need to spend there?

No, all the spending is done there. There's ample open capacity at Kalamazoo. We don't have it manned 21-7 at this point. So there's plenty of open capacity. And that was by design. When we put it in, we put in more capacity than was required to service the general engineering market. And you'll recall part of our story line around Kalamazoo is that it provides longer-term capacity to facilitate the significant growth that we expect in automotive extrusions. So, as we get into later this year and into 2013 and 2014, we expect to begin shifting some of our automotive production to Kalamazoo as well. So, there's a lot of open capacity there in terms of manning it, as well as the throughput per hour at Kalamazoo. We expect a lot more from there over the next three or four years.

And in response to that question, or that answer, I guess, the ample capacity that you have there, plus lower -- maybe call it lower than expected shipments from that facility at this point in time, can you quantify maybe the drag on the margin, either from an EBITDA or operating level from Kalamazoo at this point?

Well, we've been able to replace -- we've been able to satisfy demand from other facilities in the system. So, it really hasn't hurt us, other than Kalamazoo isn't operating as efficiently as we expect it to be. It's really a cost problem rather than an output from a Company standpoint issue.

And then, if I could ask maybe about your guidance, you had talked about the 10% to 15% improvement in value-added revenue, and you gave good color on the individual segments. We appreciate that. Can you kind of discuss maybe what your assumptions are for volume versus price? And I say price as value-added price per pound for the business mix as a whole, in those assumptions of 10% to 15%, or is that just volume that you're quoting there?

Yes, it includes some mix, because the aerospace is, order of magnitude, $2 a pound, and the rest of it is around $1 a pound. And I said in one of the answers here that we expect aerospace to be on the high end of that 10% to 15%, and the other stuff to be on the lower end of the 10% to 15%. So, that would imply that there's some mix improvements in there, with more aerospace content as we go forward.

Yes, I understand. I guess I understand that, but if I carry it back into what pricing would do, or value-added pricing per pound per segment, do you expect that we're going to remain somewhat static here, or do you see that number sliding slightly up or down, for each individual --?

In terms of real pricing, because real pricing for us is a lot more granular than the broad end use applications that we provide to you. If we boil it down to individual products, at this point, we don't see any significant change one direction or the other in terms of pricing.

So, if I look at this other than just mix differential, your value-added revenue per pound guidance for the full business is simply -- majority of that would be considered volume improvements year-over-year?

Exactly.

Okay.

And the way I look at it is I look at the value-added revenue dollars, and then we look at our variable contribution as a percent of those dollars, and we think those are going to remain relatively stable.

Excellent. Sounds good. Thanks, guys.

We'll take our next question from Steve Levenson with Stifel Nicolaus.

Thanks. Good morning, everybody, or good afternoon I guess, depending on where you are. You used the word ambitious before, when you described the air framers' plans on build rates. Does that mean you're not totally confident they are going to get to their targets, and is that sort of a short-term or longer term assumption?

No. Frankly, I'm confident, and I think Boeing and Airbus are very confident. I didn't go into a lot of granularity on the Airline Monitor forecast, but if you look at their forecast, and we put side-by-side bars in the slides that are on the website, showing the old forecast and the new forecast. They have actually softened their build rate, they being Airline Monitor, softened their forecast out in I think it's 2015, 2016, and that has nothing to do with demand. It's actually, they have an assumption, because we asked Airline Monitor -- what happened here, why are you forecasting slightly lower builds out there? And they are just assuming that there are going to be some issues at Airbus and Boeing, not related specifically to the total builds, but more specifically they're anticipating some problems when Boeing switches the 737 to the Max, and Airbus switches to the Neo.

So, we don't think those are going to happen, and Airbus and Boeing, we're in close contact with them. They think these are pretty minor changes in terms of the design. They don't anticipate any big production problems. So, we think that the builds are going to be more a straight line. But another opinion is Airline Monitor's, they think there may be some rough patches in there, and time will tell.

Got it, thanks. And speaking of 737 Max and A320 Neo, do you think you'll have opportunities there similar to what the case was on 747-8 versus the old 400?

You mean in terms of monolithic design?

Right.

I presume that's the thrust of the question.

Exactly.

Yes, we think there will be heavy monolithic design. We think most of the single aisle has heavy monolithic design content now, but there could be some opportunities. Every time we update our projections, our 10- and 20-year projections, we have more content, because we're surprised that there are monolithic design applications. So, I think we're going to see steady growth, but I don't think the new designs are going to create any step change. I think it's just the steady change of putting more and more monolithic design into all the aircraft.

Got it, thanks. Last one, as you expand capacity, and manage orders and mix, do you think there's potential for aerospace to become more than 50% of the shipments by weight? And obviously, you get that percentage addition on dollars.

You know what, I hate to admit this, I'm an aluminum guy, but I don't even look at the shipments. I can tell you that for the full year, I think we were 58% or 59% aerospace, in terms of our value-added.

Right.

And there's the potential for that to even increase this year, depending -- because aerospace is going to continue to be strong. It's really a function of how rapidly the industrial economy improves.

I should have flipped the question, then, to ask about the value-added being maybe more than 70%.

Certainly not in the short-term, and I don't think even our long-term projections have it getting much, maybe into the low 60%s, but not much beyond that.

Okay.

We have expectations for growth in the other areas, too.

Yes, good point. Dan's point's a good one, because it's really so high now, because the industrial economy has been so putrid in terms of the economic recovery here.

So, you could have a more rapid recovery in the other areas, even as aerospace --.

Exactly.

Okay, great. Thank you very much.

We'll take our next question from Tony Rizzuto from Dahlman Rose.

Thank you very much. Hi, everyone. I have a couple questions. Just to follow up the questions -- thanks for all the color, by the way, on the value-added revenues and the mix. Jack, in the past, you've talked about value-added revenues. And I think on a per-pound basis, about how we compare to historical trends, and I recall a couple years ago you did that, but I was wondering if you can kind of put it in perspective. I'm kind of thinking that maybe there is more scope for pricing, and then you made the comments that you don't really see it that way. Maybe just being conservative. But could you refresh my mind a little bit about how you see the current pricing in the aero and high-strength product categories for you? And then I've got a couple other questions, too.

Yes. Well, from an aero and high-strength standpoint, a large portion of that business is long-term contract business. So, that is relatively stable over various timeframes, and we see gradual improvement over time, but it's relatively stable. The bigger impact is on the spot business. We've seen some strengthening in the spot prices there, and in some other areas here in the past few months, as just general overall demand improves. But we don't think we'll ever see a return to the kind of pricing levels that we saw in 2007 and 2008. And there were a lot of hedge fund investors who accused me of being a terrible pessimist when I said that those prices were absolutely not sustainable over the long-term.

Those were peak prices that I don't think we'll ever see again, and there are many points of margin. If we look at the prices in '07 and '08 versus what prices are now, and what we think long-term prices are, it's several points of EBITDA margin, more than 5 points of EBITDA margin. So, it's a big number. That being said, that I don't think we'll get back to '07, '08 kind of levels of pricing on spot business in either general engineering, plate, or in some of the aerospace products, we think that we're at low levels now compared to what the norm is. So, we think we'll see a little bit of margin growth, just not getting back to those '07 and '08 levels in terms of pricing margins on plate in particular, if that answers your question, Tony?

Yes, it does. That's very helpful. And I apologize if somebody already asked this, but I just wanted to ask you a question on the Airbus, the A380 wing crack issue. And I was wondering if you could describe the nature of the issue, or the problem there? And do you think, is it thought that it's a design issue, or is it a materials issue, or just what is your knowledge on that at this point?

My knowledge isn't very deep on that, Tony, and so I'm not even going to try to get into a technical explanation there. But our guys looking at it think that, longer-term, there could be some opportunities for Kaiser there, as the solutions are developed and are addressed there. So, it's not -- in terms of Kaiser's outlook, it certainly is not a negative, and if anything, it could be a long-term positive for us. And I really don't want to go any further than that.

No problem. And then finally, are you involved meaningfully as a Company in the aluminum lithium alloys?

I would not say meaningfully. The other two have invested -- announced investments there, and have major programs there. From their standpoint, it's more defensive, because from a composite standpoint, a lot of the composite content that goes into aircraft is subtracting from some of the proprietary alloys that some of our competitors have. So, they have a major incentive there from a defensive standpoint on some of their high-margin business.

From our standpoint, we are actively engaged in aluminum lithium, and as that market develops, we're very confident that we'll participate in that market. We've not been on the vanguard here, for the reasons that I mentioned, but as that market develops over the longer-term, we will be a player there.

That makes a lot of sense. And then, just if I could sneak in one more question, just to follow up on the Trentwood stub expansion, is this a combination of, you're adding heat treat, stretching, maybe ultra-sonic, inspection, it's everything, really, across the board expanding there, debottlenecking?

Yes, working backwards, it's just about everything. It actually isn't ultra-sonic, although I was a little surprised when I was up there a couple of weeks ago. We still have the immersion tank -- Tony, I don't remember if you've been up there and seen --?

Yes, I have. I remember that.

Yes, we had actually shut down the immersion tank, but with the volume going through there, and some of the bursts in mix that come through, they are actually running the immersion tank occasionally. So, we have plenty of capacity from a sonic standpoint. It's just a matter of bringing the immersion tank back into practice when we need it.

But other than that, it's expanding virtually everything. It's an additional module on one of the furnaces at -- in the heat treat plate area. It's aging furnaces that we're doing. It's preheat furnaces on the hotline. It's just a bunch of other little things. So, it really runs through the entire facility. We're really bumping into multiple bottlenecks through the plant, and frankly, the bottlenecks change depending on the mix that's going through the plant.

So, it's become a much more complicated plant to operate, and is causing some of the inventories -- we've had to put some strategic inventories in place to manage the flows going through the facility. So, there are lots of investments in equipment, as well as the strategy of how we operate the facility there, wringing out the full capacity of the plant.

That's interesting, because I remember you've got a lot of room there, obviously, because it used to be the multi-product capability, so you have a lot of room to do all of that. But I was wondering, what kind of negative impacts has that had on your performance, as you've been kind of in this process of ramping up over the last three, four years.

Yes, it really hasn't had a negative impact, but it has slowed us capturing the full potential of Trentwood. So, our cost performance, when we compare it to the past, has been solid. Our variable cost performance, or our efficiencies are comparable to what we had run historically, but we've expected to get more cost, better cost performance than we had. So, it goes back to one of the prior answers that I had. There's been so much focus on Kalamazoo, but in terms of our margin potential as we look forward, there are a lot of efficiency potentials. And we expect to get a lot more out of Trentwood as we get smarter and smarter about managing the mix and the volume that's going through there. And the same thing in many of our other facilities as well.

So, while we were relatively pleased with 2011 performance, in here, I'm not real pleased with the efficiency, because we left some money on the board, frankly. We didn't perform as well as we could have, and we've been very open about Kalamazoo, but we could have done a lot better at Trentwood, and we could have done a lot better at a few of our other facilities around the system. So, it's why we don't have the party hats on in here. We had a nice year in 2011, but we could have been a lot better in 2011, and it's why we're so optimistic about the future because there still is just a lot of untapped potential here. This Company has a long runway in front of itself, in terms of improving.

That's great color, Jack. I appreciate it. Thank you.

At this time, we have no further questions. I would like to turn the call back over to Jack Hockema for any closing remarks.

Okay. Thanks, everyone, for joining us on the call today. Good questions, and a lot of good discussion here. And we look forward to updating you on our first-quarter 2012 conference call in April. Thanks again.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation. You may now disconnect.