Kaiser Aluminum Corp (KALU) 2012 Q2 法說會逐字稿

Good day, and welcome to the Kaiser Aluminum second-quarter 2012 earnings conference call. Today's call is being recorded. At this time, I would like to turn the conference over to Ms. Melinda Ellsworth, Vice President, Treasurer. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's second-quarter 2012 earnings conference call. If you've not seen a copy of today's earnings release, please visit the Investor Relations page on our website at KaiserAluminum.com. We have also posted a PDF version of the slide presentation for this call. Joining me on the call today are Chairman, President, and Chief Executive Officer, Jack Hockema; Executive Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neal West. Before we begin, I'd like to refer you to the first three sides of our presentation and 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 annual report on Form 10-K for the full year ended December 31, 2011 and current report on Form 8-K filed on May 24, 2012. 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. In addition, we've included non-GAAP financial information in our discussion, and reconciliations to the most comparable GAAP financial measures are also 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 turn the call over to Jack Hockema. Jack?

Thanks, Melinda, and welcome to everyone joining us on the call today. We are pleased with the second-quarter results, which, combined with the first quarter, produced record-breaking first-half sales and earnings results. Key drivers for the strong results were strong underlying aerospace and automotive demand and steadily improving pricing, including benefits from lower contained metal costs on high-value added products.

In addition, we have solid execution at our plants, especially at Trentwood, which operated around planned equipment outages related to the Phase 4 heat treat plate expansion project. We continue to benefit from more than $400 million of investments made over the past few years to increase capacity, improve efficiency and quality, and expand our product offering, and our record results over the last 6-months and 12-month periods demonstrate meaningful progress toward the long-term potential of our platform.

Turning to slide 6, our near-term outlook remains positive. We expect strong aerospace and automotive demand to continue in the second half of 2012 and in 2013. We are beginning to gain visibility into next year for aerospace plate, and we foresee requirements that are likely to fully utilize Trentwood's plate capacity next year, including the Phase 4 expansion. In addition, we have financial flexibility that will enable us to capitalize on expansion opportunities presented by growing aerospace and automotive markets and to enhance our platform through value-creating acquisitions. Now turning to slide 7, Dan will provide further insight into the second-quarter and first-half results.

Thanks, Jack. Value added revenue through the first half of 2012 was up significantly relative to the comparable period in 2011, driven by strong demand for aerospace and automotive products. Sequentially, value added revenue declined 5% in the second quarter, consistent with our expectations, and primarily due to planned equipment outages at our Trentwood facility related to our Phase 4 heat treat plate expansion, which we discussed in our first-quarter earnings call. As we look at each of our end market applications, aerospace and high-strength value added revenue improved substantially in 2012 relative to the comparable 2011 periods, up 27% in the second quarter and up 31% in the first half of 2012. These year-over-year improvements significantly exceeded commercial aircraft build rates.

Strong demand and solid execution in our facilities drove higher shipments and greater use of our capacity additions, particularly for aerospace plate. Additionally, we are benefiting from a more favorable pricing environment and lower contained metal costs. Value added revenue for automotive extrusions also showed a step up, with the second quarter and the first half of 2012 increasing 12% and 17%, respectively, compared to the prior-year periods. These improvements reflect higher North American automotive build rates and continued penetration of aluminum extrusion content on new and existing automotive platforms. We are also seeing improved pricing on certain products in automotive in 2012.

Value added revenue for general engineering was up approximate 5% for the second quarter and 7% for the first half of 2012, compared to the 2011 periods, primarily due to improved pricing on certain products, and lower contained metal costs. Demand remained lackluster, however, reflecting the slowly growing North American industrial economy. Further detail on value added revenue, which represents our net sales minus the hedged cost of alloyed metal, can be found in the appendix on slides 21 and 22.

Trends for adjusted consolidated EBITDA on slide 8 show a step-change improvement in 2012 compared to the levels of 2011. Second-quarter adjusted consolidated EBITDA of $46 million was a 51% improvement over the prior-year second quarter. And for the first half of 2012, adjusted consolidated EBITDA of $90 million was a 69% improvement over the prior-year period. Stronger shipments in virtually all products drove greater operating leverage which, along with an improved pricing environment, continued the trend of improvement.

On a sequential basis, although value added revenue declined 5%, our adjusted consolidated EBITDA improved slightly, setting an EBITDA margin as a percent of value added revenue of 24.7%. This reflected strong execution, as well as a few items unique to the quarter that added 2 percentage points of margin, including workers compensation insurance settlements and lower incentive compensation expense to reflect the higher EVA threshold required on the cash we raised in our debt offering.

Because EBITDA margins can vary quarter to quarter, we believe that the average margin of two or more consecutive quarters is more often useful and appropriate when gauging our performance. For example, on a trailing-12-month basis, our adjusted consolidated EBITDA was $148 million, and the EBITDA margin was 21%. Both of these are records for Kaiser, and they demonstrate significant progress towards the long-term potential of our existing platform to normal market conditions achieve EBITDA margins well above 20% on annual value added revenue well beyond $800 million.

On slide 9, we show key consolidated financial metrics. Consolidated operating income as reported was $40 million in the second quarter and $86 million for the first half of 2012. These included non-run-rate items, which are detailed in the appendix on slides 23 and 24. Adjusted for non-run-rate items, consolidated operating income was $39 million for the second quarter, an improvement of 64% over the comparable 2011 quarter. And for the first half of 2012, adjusted consolidated operating income was $77 million, which was a 90% improvement over the first half of 2011, again reflecting an improved pricing environment and stronger shipments across all end-use categories.

Reported net income for the second quarter was $21 million, or earnings per diluted share of $1.09. Adjusting for non-run-rate items, second-quarter net income was $20 million, or adjusted earnings per diluted share of $1.06, which compared to $1.09 for the first quarter of 2012 and $0.63 for the second quarter of 2011. Our effective tax rate for 2012 was approximately 38% at the end of June. However, given our sizable net operating loss carry-forwards and other tax attributes, our cash tax rate remains in the single-digit percentages.

Cash from operations in the first half of 2012 of $75 million continued to more than fund capital spending, interest payments, and dividends. And during the quarter, we took advantage of his favorable credit market conditions, as we have done in the past with our convertible debt offering in 2010 and our revolver modification last year. With our successful $225 million debt offering in May, we are positioned with even greater financial flexibility to pursue organic and acquisition growth opportunities. And now I will turn the call back over to Jack to discuss industry trends and our business outlook.

Thanks, Dan. Turning to slide 10 and our outlook for aerospace and high-strength applications, we expect continuing strong aerospace demand in the second half, driven by steadily increasing build rates. However, we also expect normal seasonal weakness for service center, aerospace, and high-strength applications in the second half. As mentioned in my opening remarks, the outlook for 2013 aerospace demand continues to be very positive, and we expect that our order book will fully utilize our heat treat plate capacity, including the Phase 4 expansion in 2013. Beyond 2013, we remain optimistic about our prospects for aerospace applications, and we continue to evaluate market and customer needs to determine if and when additional heat treat plate capacity is required beyond the Phase 4 expansion that will be online by the end of this year.

Turning to slide 11 and automotive, the build rate forecast for 2012 is approximately 15 million vehicles, up almost 15% from the prior year. We expect normal seasonal underlying demand weakness in the second half of this year, driven by seasonally lower build rates, but this should be partially offset by our shipments for new programs launching in the second half. Our long-term outlook for automotive is very bright, with prospects for steadily increasing build rates and aluminum extrusion content, driven by light-weighting initiatives to achieve improved fuel efficiency.

Turning to slide 12, the outlook for general industrial applications remains tempered, given the macro economic headwinds, and the US economy is still burdened by a very weak recovery from manufacturing. Ongoing global and US economic uncertainty clouds our visibility for these applications in the second half and beyond. The order patterns this year for our industrial applications is similar to last year, when we saw strong first-quarter demand and restocking followed by a weaker second quarter with destocking. This year, the order weakness and destocking were especially pronounced in June, and order patterns in July are exhibiting normal seasonal weakness. These facts reinforce our expectation for a slow- or no-growth industrial economy in the second half, with normal seasonal weakness and potential for further destocking throughout the supply chain.

On a brighter note, Kalamazoo continues to make steady progress. Product quality is a step change for the industry and is being positively recognized in the marketplace. Throughput capability continues to improve. Unfortunately, the weak industrial economy constrains our ability to achieve our potential until the macro economic headwinds subside. Looking to the future for Kalamazoo, we have begun the automotive preproduction approval process at the plant to be in position to provide additional capacity in the Kaiser system for longer-term automotive sales growth.

Turning to slide 13, and pulling this all together, we expect value added revenue in the second half to reflect the strong aerospace and automotive demand, with impact from normal seasonal weakness in all applications. Sequentially, we expect that the second-half value added revenue will decline approximately 5% compared to the first half, but this is still at a level 10% to 15% higher than the second half of 2011. We expect that the headwinds from seasonally lower sales volume and from planned and major maintenance expenses will be a drag in the second half. Combined, these two factors are expected to have an impact of 3 to 4 percentage points on second-half adjusted EBITDA margin. That said, we still expect our second-half and full-year margin to be a step change from the same periods last year.

Turning to slide 14 and a summary of our remarks today. The first half was a very strong start to the year, with record sales and earnings results. We are very optimistic about our prospects for the remainder of this year and for next year. This optimism is based on strong underlying demand for aerospace and automotive applications, combined with the capacity that we have created to meet this demand. Longer term, we are also very well-positioned with financial flexibility and capital-efficient investment opportunities to capitalize on the long-term demand growth expected from our very attractive markets. With that, we will now open the call for questions.

Thank you. The question-and-answer session will be conducted electronically.

(Operator Instructions)

Dave Katz, J.P. Morgan.

Congratulations on the great quarter. I have two follow-up questions. One, I thought you were saying that there might be an additional ability to do heat treated expansion post-Phase 4. Was that correct?

That is correct. We have on the shelf Phases 5, 6, and 7. And in my remarks, I alluded to it, but we continue to monitor customer needs in our outlook for the market to determine if and when it is appropriate to pull the trigger on any of those expansions.

And if we look at that first one, Phase 5, by how much would that expand capacity by, and how long would it take before that could be put in place?

They -- all three phases vary, but they are all order of magnitude similar to Phase 4, in that 5% to 10% increase in total heat treat plate capacity. All of them are order of magnitude 1.5, 2 years timeframe to bring them online.

Okay. On the EBITDA margin, I thought you had said that -- I want to make sure the timeline -- you said second half of 2012, your thoughts right now are that the margin may be down 3 to 4 points compared to first half of 2012, and that's EBITDA margin on the value added revenue, correct?

Yes, it is EBITDA margin on value added revenue. And to be specific, there are other factors involved, but two clear factors. One is we expect seasonally lower volume, which typically happens every year, unless it is a really booming market. And the second is we have higher planned major maintenance expense in the second half, which is also usually typical. So, the combination of those roughly of 5% lower value added revenue, which is less operating leverage, and some higher planned major maintenance expense could have an impact of 3 or 4 points.

Excellent. Thank you very much.

Steve Levenson, Stifel Nicolaus.

Thank you. Is there a target normalized incremental operating margin or EBITDA margin on value added revenue? Because obviously right now, the number's pretty big, but there's some significant changes in the demand picture and in what you're doing in the factories. So I'm just trying to think longer term about what to use.

Yes, good question. Dan had some numbers in his remarks there, but if you look at the first half of this year, which factors out some of the quarter-to-quarter noise, it was in the 23.5%, 24% range, a little less than 24%. Last 12 months, I think is trending around 21% for the last 12 months. We said we expect to see some degradation in the second half with less leverage and higher major maintenance expense.

So we are in the low 20%s now, but what we've been saying consistently for the past year, 1.5 years, is that when we get to a normally economy, which we are not yet, certainly in terms of the US industrial economy, and even in auto builds. When we get to a quote normal economy, we have the potential value added revenues well above $800 million on an annualized basis, and margins well into the 20%s, and obviously, we're into the 20%s already. But operating leverage has a big impact, so well into the 20%s is well above where we've been the last 12 months.

Okay. Thanks. One of the questions I get from a lot of the people that I talk to are gee, you've got an awful lot of cash. It is a little bit scary. What are you going to use of for? I don't know if you're looking to add more things horizontally, or if you're looking to go downstream? I know there have been a number of recent acquisitions of companies that do precision machining, and curious if you had some comments on that?

We look in all directions, but primarily we look for bolt-on type opportunities, and we primarily look for US income because of the NOLs that we have. So those are two factors, but the primary factor is we look for businesses we understand, that are complementary to our platform, and where we have a clear vision of how we create value for the shareholders. But most likely, they're acquisitions similar to the things that we've done in the past that have been complementary products that expanded our product offering in businesses and markets that we understand.

Good enough. Thank you very much.

Mark Parr, KeyBanc.

Thanks very much. Congratulations on a nice quarter. I had one question in particular. It looks like the automotive extrusion growth was a lot less than underlying US vehicle production growth. I was wondering if you could help me reconcile the difference in the growth trajectory of the Automotive business relative to the industry?

That's a really good question. You've had time to dig already this morning. I thought you had enough calls, you'd be distracted.

I put it this way, I just bring lots of extra shovels on these weeks.

Now that is a good question, and there is an answer for it. Most of our applications were consistent with the build rates, applications that spread across all platforms, for example, anti-lock brake systems. But some of our other applications, like driveshaft, tubing, and in particular in this case, bumpers, are on specific platforms. And in fact, some of the bumper platforms we're actually transitioning on models.

And you may not have picked it up in our remarks, but I indicated in my remarks and the outlook that we would see seasonal pressure in the second half on automotive because build rates are down 10% or so, but that would be offset by new launches. So some of the platforms that we are converting over to new models in the first half that depressed our automotive a little bit will give us a boost counter to seasonality in the second half. It's really model change-overs on some specific programs that we are on.

Okay. All right. That's helpful. Another question, if I could ask another. Just would like to get an update on progress with the monolithic design and what sort of growth trajectory you expect for that particular piece of the aluminum plate market in the second half and in 2013?

I don't know that it is going to have that significant an impact on second half or even 2013, but from a qualitative standpoint, what I will say is that every year when we update our outlook in terms of the utilization of our product per airframe that's being built, it gets boosted on virtually every airframe in the entire system, because there are more and more conversions to monolithic.

While it is not nearly the pace that it was six or eight years ago when they were converting everything over, we continue to see significant conversions every year of more and more monolithic designs, so that's a nice strong underlying driver. But still the key driver for us is the build rates that we've seen and the larger aircraft that they are building, longer and wider aircraft.

Okay, terrific. Thanks for the color, and congratulations again on a great outcome.

Timna Tanners, Bank of America Merrill Lynch.

Wanted to follow up, because we caught something, I think, in the queue where you talk about removing the restrictions on the VEBA on stock sales. I was hoping you could clarify if you know that that happened, because it looks like it was granted on June 19. And if that indeed means that the Union would have been able to sell off all of its remaining shares held with them, that they've held?

Yes, Timna, we did -- the Board look at this and was really driven around the impact it may have on our NOL protection, and we decided it wasn't necessary any longer to have the VEBA restricted. So, the Board granted them the permission, or removed the restriction, better said, for them to sell the remaining shares, and it was in June. What has happened since then with regards to the sales of shares, we don't have visibility to.

Okay. Thanks for that. I was wondering if you could talk a little bit about how we're hearing that the aluminum market is really tight. How is that affecting you at all in getting -- how are you passing along the Midwest premium? And then along those same lines, if there were a change in the Midwest premium, how would we see that manifest itself in your earnings?

In relation to the premium, virtually all of our contractual metal pass-throughs are based on Midwest price. So we don't pass through LME, we pass through Midwest.

Right.

And even when we do firm prices going forward, we do the same thing. It is based on the Midwest price. So we expect to recover the premium irrespective of what it is. From a supply standpoint, we have good, strong secure supplier relationships with all the big suppliers, and we are very big, good customer to them. So, we don't have any significant supply concerns, contrary to maybe what some smaller people are saying.

Okay, that's helpful. And then, if I could, one last one. There seems to be a lot of announcements still of new downstream capacity being developed, and I was wondering more on the long product, the rod product, not so much on the plate side, how you're seeing the competitive environment there?

You are talking specifically rod and bar?

Yes, that's right.

I'm not aware of any significant downstream expansions in rod and bar, at least amongst the three major suppliers of soft alloy rod and bar products. And the other factor, Kalamazoo being one big factor in Kaiser, Select another, but the bar continues to be raised there in terms of the requirements for the marketplace. We are not seeing a significant issue, or an issue of any kind, in terms of excess overcapacity from new capacity coming on-stream, legitimate capacity coming on-stream. It is more a function of the very weak industrial economy. But pricing has been stable and is pretty much at what I would characterize as normal rates today.

Okay. Thanks a lot.

Lloyd O'Carroll, Davenport & Company.

You said that your capacity at Trentwood was restricted because of Phase 4. When will Phase 4 be completed so as to make the entire capacity available to you?

It is really -- the impact will be in 2013. We make get a little right at the tail end of the year, but it is really a 2013 impact.

So sometime in the first half?

No, we'll be pretty much on-stream by the end of the year. We expect we will have it almost day one in 2013.

Okay, thank you.

Ed Marshall, Sidoti & Company.

Most of the questions have been answered, but I'm curious, the capacity increases on the Phase 4 that you expect to hit in 2013. What effect, if any, do you think will have on pricing based on, I think you said that the capacity will be fully utilized in 2013? But I'm just curious to think about what your impact on pricing would be if you had additional capacity?

We are certainly adding capacity that's required by demand. Witness the fact that we're going to have it sold out. So, us adding that capacity will have no negative impact on market prices, if that's your question.

Yes, okay. The customer psychology, generally in rising pricing environment, they tend to overbuy. Do you think that that is a scenario that you're seeing right now? There's a little bit of oversupply. It looks like you're outpacing the aerospace demand drivers anyway.

Yes, I think the underlying reason for us outpacing the build rates is that we -- the inventory overhang in plate. We really didn't see plate start to pick up, and if you go back and look at our trends, you'll see we --it really picked up strongly in the second half of last year. The first half was still relatively anemic.

It is more the plate overhang, and we see it in our other products. We saw our extrusions and our rod and bar and our drawn tube aerospace pick up much sooner than the plate did. Some of that's lag time on getting the products into the airframes being built, but most of it was just recovering from that big plate inventory overhang.

And you mentioned a few major maintenance outages in the second half of the year. Are they part of the Phase 4 expansion? Are they in aerospace?

No, most of it is routine planned maintenance. Typically, it is primarily furnace rebuilds. There may be a little bit related to Phase 4, but most of the -- there are no significant equipment outages that will impact our throughput in the second half. These are normally scheduled when there are seasonality, which means customers are taking shutdown. So, you get weak July and weak November and December demand because of shorter work weeks. So, we do more maintenance during those periods.

Tough question to answer, I don't mean to you on the spot, but do you think it is pre-buys you're seeing right now? Customers are preparing for the maintenance schedules, or --?

No. No. They're transparent to the customers. They won't even know that we did any of these things.

I see. Okay, thank you.

(Operator Instructions)

Tim Hayes, Davenport & Company.

The first question on the price increase, the $0.03 price increase on rod and bar products, that was, I think, a few of the customers put in place -- or not customers, competitors put in place a month or so ago. I'm assuming you guys went along with that. Did that $0.03 stick in full?

Yes, the prices are sticking.

Any likelihood of another increase, particularly you keep watching this billet premium keep climbing? And maybe others might be compelled to raise prices to cover that billet premium?

Could be. Could be, although the counter factor here is now we are into the seasonal period, and we continue to see weakness in the industrial economy here. But we don't see any degradation in pricing. I'm not sure that we will see any significant movement in rod and bar in the short term.

Okay. Out of your total extrusions, what percentage is rod and bar, say, versus all other extruded shapes?

In what we break out, you can see automotive. Automotive is one big factor, and then we have rod and bar, which is another significant factor. It is probably more than 50% of our total extrusion volume, even including automotive. And then the rest of the volume is primarily tubing-type product.

All right. Then final to clarify on the guidance for the step-down in EBITDA margin by 3 to 4 percentage points, is that from the average in first half of 2012, or just from Q2 of 2012?

If everything else is the same in the second half as was the first half, which won't be the case, and I don't know which way it will go. I just know it will be different. It won't be the same. Those two factors alone are worth 3 to 4 points. But then you got what's going to happen to pricing, what's going to happen to other costs, and all those things. There a lot of factors in there that can move it 1 or 2 or 3 points either direction. But all things being equal, it's basically 3 to 4 points on the lower volume and the higher major maintenance expenses.

Right. But it sounds like that's a second half compared to the first half?

Yes. Yes.

Okay, thank you.

Tony Rizzuto, Dahlman Rose.

All my questions, for the most part, have been answered here. I wanted to firm up, then, the timing. Did I hear you say, Jack, I want to confirm here that the timing for each phase of expansion would be about 18 months?

Yes, once we pull the trigger, it will be, depending on what we are doing, but they are typically 18 to 24 months --.

Okay. All right, good. Also, I know that you were pretty seamless, obviously, judging by the margin that you achieved in the quarter, but was there any impact at all negative-wise in terms of the Phase 4? Negative impact that you could identify?

Yes, the only impact from the Phase 4 is what we signaled on the last call, which is we did have some planned outages that curtailed some of the heat treat plate production in the second quarter. That was one of the primary reasons that the second quarter throughput, or value added revenue dollars, was lower than the first quarter, was the Phase 4 expansion.

Okay. So is that still going to be a limiting factor then in 3Q or 4Q?

No, the major equipment outages related to Phase 4 are behind us. There's still a lot of other work that they are doing there, but none of it entails major equipment outages that are going to be a significant dampening effect on our throughput.

Okay. And generally, a lot of other companies are -- have been talking about a pronounced downward shift in activity levels, with customers telling supplies they need less metal required at the year-end. And it doesn't sound to me that your -- outside of the normal seasonality, it doesn't appear to me that you've got any of those similar concerns. And I'm not obviously talking about the heat treat for aero, but in any of your other product categories?

If you go through those, I will even start with aero. We are seeing normal seasonal weakness in all of our aero applications, primarily service centers, that's where it shows up the greatest. We are seeing seasonality, even in aerospace, and in particular, service centers. Automotive, we are seeing strong seasonality in the build rate forecast, and the second half is roughly 10% lower than the first half, which, again, is not unusual.

But we expect to offset that somewhat, in the answer I gave to Mark's question earlier, because we have some new programs coming on in the second half. But in the general engineering and other industrial applications, we are seeing a very normal seasonality, which is pretty severe here. The economy is no news to anyone on this call. The manufacturing economy is basically flat.

I heard all the calls of distress in July. My answer in our staff meeting is well, this sounds like a July staff meeting. Everybody moaning and groaning because order rates are down, and it is like duh, that happens every July. And we saw pretty significant destocking in late June and really soft orders in June as well, so it really started in June leading into July. To me, unfortunately, it feels like a normal second half in most areas, other than the strong underlying demand in aerospace. But we are still, even in aerospace, going to see seasonality.

Okay. Fair enough. I appreciate all the color. Thanks very much.

Phil Gibbs, KeyBanc Capital Markets.

Jack, I had a question on the CapEx. We are looking for $50 million this year, $50 million next year. That's, call it, $70 million in growth CapEx. A lot of that this year I'm assuming, if my numbers are right, are going to be going into Phase 4 expansion. And what other, call it, internal organic opportunities do you have to put dollars to work in a good way, and where would you be targeting?

We've got -- if you are talking longer term over the next two or three years, I presume that was the thrust of your question, I outlined a lot of those on the last earnings call. But as we've already alluded to on this call, we've got Phases 5, 6, and 7 heat treat plate expansions at Trentwood on the shelf.

And it is a question if and when we will pull the trigger on any or all of those as we go forward, because we continue to monitor customer needs and our own views of where the market is headed in general. We still have opportunities to expand our aerospace extrusions business. We expect that automotive, while we are going to get some initial capacity from -- excess capacity at Kalamazoo that will help us with automotive, we expect that we will be making investments in automotive.

But then beyond that, we still don't feel that we are anywhere near our full potential in terms of the efficiency and the quality capability of our platform. So, we've got fairly significant opportunities we are looking at over the next two or three years that would address efficiency and quality and not just raw capacity. Those extend throughout the platform, but the major thrust would be in aerospace and automotive-producing facilities.

You've done a lot of rationalization through the pipeline over the last few years to enhance your operational flexibility and cost structure. But how much more can you do to the base business too lean it out, and where are we in that process?

That will never end, and frankly, there are significant opportunities there to continue to make our platform more efficient and enhance our quality.

Okay. Lastly, and I will hop off. How is the capacity expansion going at Alexco, and basically, where are we relative to those plans and those targets? Thanks.

Alexco is doing very, very well. We are seeing normal seasonality there, because a lot of what they do goes through service centers in the second half here. But we are very, very pleased with Alexco and very pleased with how efficiently they executed what was a major capital project there. There was a building expansion and a lot of new equipment going in there, so they are real pros down at Alexco and have done a great job from that standpoint.

And in terms of Trentwood, Trentwood performed well, despite the distractions they've had up there. Trentwood is doing very, very well, and I mentioned in my remarks Kalamazoo continues to improve, as well. From a performance standpoint, I'm never satisfied. I'm just less dissatisfied than normal with our operating performance. Okay, and are there any more questions, operator?

At this time, there are no additional questions. I will now turn the conference back over to Mr. Hockema for any additional or closing remarks.

Okay. Thanks, everyone for joining us on the call today, and we look forward to updating you on our third-quarter called in October. Thanks again.

And that does conclude today's conference. Thank you for your participation today.