Kaiser Aluminum Corp (KALU) 2013 Q1 法說會逐字稿

Good day, and welcome to the Kaiser Aluminum first quarter 2013 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Melinda Ellsworth. Please go ahead.

Thank you. Good afternoon everyone and welcome to Kaiser Aluminum's first quarter 2013 earnings conference call. If you have 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 would like to refer you to the first two slides of our presentation and remind you that 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, 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 have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial 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. And I would now like to turn the call over to Jack Hockema. Jack?

Thanks, Melinda. Welcome to everyone joining us on the call today. We had solid underlying results in the first quarter that reflected the mild headwinds that we discussed during our fourth quarter earnings call in February. We expect these headwinds to continue in the second quarter before moderating in the second half of the year. Specifically for aerospace products other than plate, inventory overhang continues to dampen demand. Last year, 20% year-over-year increase in our aerospace and high strength value-added revenue reflected growing demand and a focus on supplier readiness that contributed to the current inventory overhang. We're also seeing evidence of some situation-specific aerospace plate inventory overhang, although the excess supply chain inventory is most prevalent in aerospace products other than plate.

For automotive, builds are relatively flat at a pace similar to last year, after the step change 18% year-over-year build rate increase in 2012. In addition, our content growth is being offset to some extent in the short-term, by a negative trend for anti-lock brake systems to smaller components and reduced exports. And for general engineering and other industrial applications, demand is down from prior year as the economic recovery continues at an anemic pace. Exacerbating the situation, we're not experiencing the benefit from significant supply chain restocking that boosted demand during the first six months of each of the prior three years. Illustrating the impact of the supply chain inventory, MSCI statistics for aluminum rod and bar indicate that while the first quarter service center shipments to their customers were down 5% year-over-year, service center purchases from their suppliers, ie the mills, were down 11% year-over-year. Nevertheless, our long-term proposition remains intact, as we expect strong secular demand growth for aerospace applications and automotive extrusion applications. With excellent prospects for long-term growth and opportunities to continue to enhance our manufacturing platform, we have embarked on several organic investments to expand capacity and to enhance our manufacturing efficiency and flexibility.

In addition to our previously announced $35 million project for a new casting complex at our Trentwood facility, we are proceeding with a new $45 million package of heat treat plate investments at Trentwood that combines various projects from the previously envisioned phases 5 and 6. These heat treat plate investments are expected to be online in early 2014 and are designed to increase our heat treat plate capacity by approximately 10% in order to meet anticipated demand in 2014 and future years, and to enhance our manufacturing flexibility and efficiencies for processing an increasingly demanding heat treat plate product mix. We've also commenced investments in our automotive platform to support new automotive extrusion programs that have been captured and are scheduled to launch over the next three years. The approximately $15 million of investment projects will further augment our manufacturing capability and capacity at our Bellwood, Virginia; Sherman, Texas; London, Ontario and Kalamazoo, Michigan facilities. Our London facility will continue to be the primary location for launching our new automotive programs and has the capability to provide dual sourcing for most automotive products to produce -- be produced in Sherman and Kalamazoo. Kalamazoo's automotive focus will be on ABS blocks and other products compatible with the facility's primary mission to supply general engineering rod and bar applications. And Bellwood will continue to focus on drive shaft and other tubing applications, while the Sherman facility will provide additional capacity and capability for bumpers and automotive structural applications.

Our planned investments in automotive extrusions are a direct result of new programs booked and the need to ensure that we have the breadth and depth of capacity and capabilities across our manufacturing platform to meet customer needs. With these investments, we expect that our 2013 capital spending will be approximately $80 million, which is at the high end of the range that we previously indicated. A portion of the spending for these aerospace and automotive investments will continue into 2014. Overall, our strong financial position and positive long-term outlook position us to continue to invest in value-creating organic growth initiatives and to pursue potential acquisitions while also enhancing shareholder value through quarterly dividends and modest share repurchases. Beginning in the first quarter, we repurchased shares under our authorization approved by the board in 2008.

Through the end of last week, we acquired $29 million of common stock and with approximately $18 million remaining under the authorization, our board has authorized an additional $75 million for future share repurchases. The increased authorization underscores our confidence in the future while continuing to preserve liquidity and financial flexibility to capitalize on other opportunities to create value. I'll now turn the call over to Dan to provide further insight into the first quarter results and then I'll provide some additional color and context regarding our short-term outlook. Dan?

Thanks, Jack. Largely in line with our expectations, total value-added revenue in the first quarter was $187 million, which was down slightly from the quarterly rate of last year's first half. The quarter reflected the headwinds we discussed in our prior earnings call, most notably a modest inventory overhang in the aerospace supply chain, flat North American automotive build rates compared to last year's first half, and weak supply chain demand for industrial applications in the first quarter, which contrasted with the restocking that we saw in early 2012. First quarter automotive extrusion's value-added revenue reflected growth in new bumper systems and other automotive applications. However, as Jack mentioned earlier, we are seeing a trend towards smaller anti-lock braking system parts, as well as reduced anti-lock braking system exports that in the short-term has offset the content gains that we are capturing in other automotive extrusion applications.

Adjusted consolidated EBITDA grew to $48 million in the first quarter. Both value-added revenue and adjusted EBITDA were boosted $4.5 million, as we recognized revenue related to a contractual payment due from an aerospace customer in lieu of that customer taking minimum volumes under a multi-year agreement. Adjusted EBITDA margin improved to 25.6% in the quarter. Excluding the impact of the $4.5 million customer payment, adjusted EBITDA margin was 23.8%, which was comparable to the first half of last year. On slide 8, we show key consolidated financial metrics. Consolidated operating income as reported of $50 million in the first quarter included approximately $9 million of non-run rate gains, which are detailed in this presentation and in the appendix on slides 22 and 23. Adjusted for these non-run rate gains, first quarter consolidated operating income was $41 million, roughly in line with the pace of the first half of 2012, even after taking into account the $4.5 million customer fee mentioned earlier.

Reported net income for the first quarter was $34 million, or earnings per diluted share of $1.73. Adjusting for non-run rate items, as well as an $8 million Canadian tax benefit, first quarter net income was $20 million, or adjusted earnings per diluted share of $1.03. Our effective tax rate for the quarter was approximately 20%. This lower tax rate reflects a favorable audit settlement that reduced our Canadian income taxes related to prior years. With our sizable net operating loss carry-forwards and other tax attributes, our cash tax rate remains in the low single-digit percentages.

During the quarter, we funded a $20 million annual variable contribution to the VEBAs and paid over $20 million of cash to shareholders through dividends and share repurchases. With quarter-end cash and short-term investments totalling $334 million and revolving credit availability of $279 million, we remain well positioned to fund our attractive growth initiatives, as well as modest share repurchases. And now, I'll turn the call back over to Jack to discuss industry trends and our business outlook. Jack?

Thanks, Dan. Turning to slide 9 in our outlook for aerospace and high strength applications, although air frame manufacturers' backlogs and order rates remain strong, as indicated in my opening remarks, we're experiencing mild headwinds for our products as the supply chain rebalances to work off pockets of excess inventory that developed during the supplier readiness-induced demand surge in 2012. While the headwinds are unwelcome, we'll take advantage of the situation in the second quarter by scheduling equipment downtime at Trentwood to accommodate construction related to our capital projects, and at our Newark, Ohio facility to complete planned major maintenance projects. Turning to slide 10, in automotive we expect second quarter value-added revenue similar to or slightly better than first quarter, as build rates continue at a pace similar to the first half of 2012. While our content growth is being offset to some extent by reduced ABS exports and smaller blocks and vehicles, we expect growing total content in the second half and in future years, as we launch booked new programs. Turning to slide 11 and general engineering applications, while the index of industrial production for US manufacturing shows a modest uptick in the first quarter, real demand is weak compared to last year, when order rates were bolstered by supply chain restocking. While visibility is limited, our current view is that the second quarter for these applications will be similar to the first quarter.

Slide 12 summarizes our short-term outlook. We expect continued demand headwinds and higher planned major project expense for construction and maintenance activities in the second quarter. Despite these headwinds and consistent with our previous outlook for the first half of 2013, we continue to anticipate that the combined first quarter and second quarter results will reflect total value-added revenue and adjusted EBITDA margins for the first half, similar to the first half of 2012. While we expect that the first half of 2013 results will be relatively flat with the prior year, we're cautiously optimistic about our prospects for the second half. Our current view is that we will have favorable year-over-year comparisons in the second half, as the aerospace supply chain inventory situation becomes less of a drag on demand.

Summarizing our remarks today, while we're experiencing short-term headwinds, we continue to be very optimistic regarding the longer-term outlook for continued strength of secular demand growth in our aerospace and automotive applications. Our continued focus on organic investments in capacity, capability, quality, and enhanced operating efficiencies, will further position us to capture additional growth in aerospace and automotive applications in the years ahead. Longer term, we will maintain financial strength and flexibility to invest organically, pursue potential acquisitions, and enhance returns to shareholders through continued dividends and moderate share repurchases, as appropriate. We'll now open the call for questions.

(Operator Instructions)

Tony Rizzuto Cowen Securities.

Thank you very much. Hi Jack, Dan and Melinda. I've got a couple questions. The first one -- first of all I just want to congratulate you guys on all the progress and you're finding the right balance between growth and returning cash and other forms of shareholder enhancements, so kudos to you on that. The first question I have is just to follow up a little bit on the guidance you provide, and I want to make sure I'm thinking about this correctly. So when we look at the first half last year, value-added revenue is $380 million and your adjusted EBITDA margin was 23.7%. Obviously you had a very strong first quarter.

With the types of things that you've got going on, some of the maintenance and preparation for the capital projects, is it fair to assume that, you know, it's going to be similar to the average that it was in the first half? Should we think about it that way? Or do we need to make any adjustments for the payment you receive from the customer during the quarter? How do you guys look at that?

Well, I'll answer it two ways, Tony. What we said in our remarks is that when we add the first quarter and the second quarter together, including the $4.5 million payment in the first quarter, that the total first quarter will be -- or first half, will be similar to the first half last year. So another way to look at it is take the first quarter with the $4.5 million, and then add it up and make the total first half similar to the first half last year. And if you -- said another way, if you back the $4.5 million out of the first quarter and then look at the second quarter, it should be similar without that $4.5 million, except there will be some additional expense related to the major maintenance and the capital projects.

Okay. That makes sense. So we were looking at the different scenarios, I appreciate that. And then in terms of the inventory overhang on the general engineering side, are we getting closer to the -- to seeing some light at the end of the tunnel there, Jack?

Well, it's just that the supply chain didn't restock as they have in the prior three years. So that's part of the reason that we were looking forward to the second half, because the prior three years we saw heavy destocking in the second half to make up for the irrational exuberance in the first half. So we've not seen that irrational exuberance here this year throughout the general engineering and the industrial supply chain. So hopefully, that gives us some benefit in second half year-over-year comparisons, assuming that the economy doesn't go in the tank here.

It's interesting, because we're hearing a lot of the industrial companies really talking about that, it's quite evident. Are you of the view that we are going to see reversal this time around from a US economic standpoint?

You mean a pickup?

A stronger second half and perhaps reversing, you know, the activity levels.

We would hope so, because, again, if the key macro indicator that we look at is that index of industrial production for manufacturing that we show in the chart in our slide deck. And it's up a tick. I mean, it's still very, very modest growth. But the fact is, it is modest growth year-over-year. But where we can get our hands on it, and anecdotally, we're seeing that there, there is -- there's not destocking of significance in the supply chain, but we're comparing to heavy restocking in prior periods.

So if -- but the full year last year, we ended up with pretty much balanced inventories. It was just restocking first half, destocking second half. So we would expect, if the economy continues to grow at a 1% or 2% pace, which the indicators tell us that it is, by the time the year is over, we should see slightly higher total demand, which means stronger second half comparisons year-over-year.

Okay, good. The final question I have right now is just on labor contracts, do you have any labor contract expirations this year?

I think we have one, one small plant. Our Sherman plant expires sometime -- yes, second half of the year. And that's the only one this year. The bigger plants, the master steel worker contract that covers Trentwood and Newark, Ohio, is September 2015, I believe, so it's still a couple years away.

Excellent. Congrats on all the success and keep it up. It sounds -- we look forward to seeing the developments. Thank you.

Okay. Thanks, Tony.

Timna Tanners, Bank of America Merrill Lynch.

Yes, hi, good afternoon. Or good morning to you guys. Hey, there. So couple questions. One was, you know, our expectation, and I know that you talked about many uses of cash, but when you did the debt rates, we thought it was more targeting more acquisitive growth and you talked in the past about that. So should we take your updated thoughts on, you know, buying back stock and other uses of cash for organic growth as maybe a substitute for that M&A, or is that still potentially on the table?

No, Timna, I think that's still on the table. We've obviously got some significant organic growth ahead of us and we're happy to see that. When we did raise the cash last year, we were hopeful that acquisitions that we were looking at were going to be coming forth and maybe something we could execute on in -- during the course of the last year. Those didn't really develop at the pace that we hoped, but they are still out there. And so we still are hopeful that we can have some acquisition growth. But we also think that we have a strong enough balance sheet that we can organically grow the available -- have cash available for acquisitions and also return cash to shareholders at the same time.

Okay. That makes a lot of sense. And then as far as the payout that you talked about from the customer who, you know, was doing so in lieu of taking multi-year agreements, can you help us understand that a little bit more? You said it was an aerospace customer. I wouldn't expect you to name names. But does this mean that we can expect less growth going forward? Is there anything that we should read into it in terms of demand growth that maybe is less than we would have hoped?

No, there's nothing -- anything that's unusual really about this, other than the fact that it was a larger payment in the context of this given quarter. So the EBITDA impact relative to the quarter was larger. But we have contract terms that are similar to this in many different customer contracts. They're designed to give flexibility to the customer but also ensure that we have some level of return under the contract in adverse times or under any circumstance. We've had capacity fees, take or pay arrangements, et cetera. And customers in the past have chosen to take rather than pay. So this is --

Let me ask it a little differently maybe. Sorry. I was just going to say, if I could ask a little differently maybe, is it a question of just part of the destocking efforts that you mentioned? Or could it be something larger in terms of less expected demand on a go-forward basis?

No, you should not expect that it has any impact on go-forward demand. These are -- this and the other type of contracts that Dan was talking about are long-term contracts that span a number of years.

Okay, great. And then the final question I had was in terms of Trentwood, I kind of lose track on the phases. You said this last one was a phase 5 and 6. Just want to make sure I understood. So that's an anticipation 10% increase in capacity into 2014, is that right, from prior levels? And in the past, you talked about many phases. So is this kind of the final stages of the potential Trentwood growth or where is this in terms of potential for Trentwood longer term?

That's a good question. In the remarks, when I said it combined phases 5 and 6, we actually picked isolated projects from the previously envisioned 5 and 6. So we're not doing all of 5 and 6 combined. We're just doing pieces of each that are specific to what we see our needs to be over the next few years. We think this will take care of us for a while, but we still have remaining pieces that we didn't do from 5 and 6, and we said we had an envisioned phase 7 out there as well.

So we still have opportunities to continue to invest and grow as we see the need. But this will -- and then the second part of your question, this will bump us approximately 10%, beginning in 2014, not suggesting we're going to use that full 10% in 2014. But we do expect that the current capacity will not be sufficient to meet our needs as soon as 2014.

Got you. Okay. Thanks very much.

Josh Sullivan, Sterne Agee.

Good morning, Jack, Dan, Melinda. Great quarter. So this is kind of a follow-up to some previous questions. On the aerospace supply chain overhang, as well as with the customer minimum volume payment, was this only related to the aggressive inventory build last year? Was there any indication that customers are more cautious over 787 battery issues or the 747-8 anticipated rate cut?

It's hard to tell. There are a million stories in the naked city, as one of our attorneys used to say to me in the old days. (laughter) So it really depends on who you talk to. But our view is -- the system just got ahead of itself. There was all of this jaw boning for two years about supplier readiness, and is everybody going to be ready to meet these accelerated build rates, and that just led to some additional overhang in the system. Some of the very situation-specific -- I mean, that's the general answer. There are situation-specific anecdotes where it may relate to a specific model, having the build rates move to the right a little bit, those kinds of things, but that's more situation-specific, whereas I think the general -- this is just my opinion, and our opinion, as we look at the landscape out there, most of this is just the system got ahead of itself.

Okay. And then just on the expansion investments that you're talking about on the aerospace side, I thought you were going to give me utilization rates. Can we talk about the current design capacity relative to current OEM production rates? What I'm trying to understand is as far as capacity on Kaiser's end, does a decision by the OEMs to go to 42 737s per month or above the 10 per month on the 787, does that have any bearing on the expansion decisions versus the current rate?

Well, certainly all of those things factor into our decision. So we look at the macro, what we expect long-term demand to be for the industry as a whole, but then more importantly, we look at what our situation is with all the pockets, commercial aerospace, as well as other high strength applications and other aerospace applications. We put all of that together and look at our expectations over the next few years and make those decisions accordingly.

Okay. But I mean as far as the announced rates right now in your capacity, are you at that -- those announced rates, or do you need the OEMs to announce additional build rates?

No, we're basing it on our discussions with customers and what we expect our customers' needs will be from Kaiser.

Okay. Great. I'll jump back in the queue. Thanks.

Edward Marshall, Sidoti & Company.

Good morning to you.

Good morning, Ed.

The question -- in your experience in the general engineering space and how the supply chain works, in these past cycles, you know, have you had the experience of maybe the first half there wasn't a restocking? Does restocking actually occur in that given year? Or do they wait until the following year as they manage working capital -- their own working capital for the remainder of the year? You have kind of any experience to share there?

It just depends. In fact, as we were preparing for this meeting, that question came up, because of what's happened the past three years, we were ready to jump to the conclusion that they always restock in the first half and destock in the second half. So I went back to the statistics that go back through 2000, and I forget the exact statistics, but it was something like 50% of the years they restocked in the first half and 50% they destocked. And the same thing for the second half. So there's really no pattern. It just is what happens to be going on at the time and what people's attitudes are about the economy.

So is it a function more about maybe lead times of material and maybe some stable pricing out there that really hasn't given any reason to kind of get overly excited to go out and purchase today as opposed to waiting for tomorrow?

No, I think it's more -- it's the same thing that was happening in the stock market and the general economy each of the past three years. If you remember, every year, in 2010, 2011, and 2012, the first quarter was gang busters. I'm not talking Kaiser. I'm talking for all industrial companies, and everybody's really bullish. And then it starts to taper off in May and June, and by the time the second quarter earnings calls come around, everybody is beginning to get worried about the second half and then you get to the fourth quarter and it's oh, my goodness, what happened here? And that happened three years in a row.

And it was just -- and you remember the administration coming out and saying we're through the recession now. Everything's hunky dory and we're back into a robust expansion here. That basically was the message in the first half of every year in 2010, 2011 and 2012. And it's been just the opposite message this year, with everything that was going on with the taxes and sequestration and all of these other discussions, it's put more of a damper on the economy. We really saw it in spades in the fourth quarter and you guys know better than I, but you've got that general tone out there that's been consistent from the fourth quarter through now, that oh, my goodness, where is the economy going? And that's a stark contrast to what we've seen each one of the past three years.

So it really comes back -- I mean, you get on the margins, what are lead times and all those things, but this is more a function of the total supply chain. It's not just service centers. It's everyone through the industrial supply chain reading the economy, the tea leaves for the economy, where they think it's headed. And right now, there's a lot less optimism than there has been in the first half of the prior three years. And hopefully, we see that correct itself.

I mean, we're beginning to see using a term from the first half of the prior three years, some green chutes out there. You know, they are hard to find, but there are some green chutes out there. So maybe we're going to see some optimism in the second half. Who knows?

You talked quite at length about the aerospace destocking that's somewhat going on and then the plate kind of creeping in here. I'm curious if you can kind of share with us perhaps the cadence of that, of the quarters, or the months within the quarter. Was it stronger in January? Was it weaker in January and then picked up in March? Kind of how it worked through the cadence maybe of the quarter, as far as the destocking and the aerospace side that you mentioned earlier, especially as it relates to plate.

In aerospace, unlike general engineering, where lead times sometimes are three days, in aerospace, the lead times are longer and the horizon is longer. We've pretty much been under this cloud and saw it already pretty heavily in the fourth quarter. So it's been a pretty constant issue in the other than plate products going clear back to the fourth quarter. And we expect that's going to continue for a while. We're hearing lots of anecdotes that sound a lot like what we heard about plate going back three or four years ago, not quite as great.

But there's quite a bit of inventory and it's extrusions, it's strong tube, it's rod and bar, it's wire. So it's widespread through -- and sheet, so widespread in basically every product we supply other than plate. I characterize plate differently in the remarks, saying that we've seen some situation-specific instances of an inventory overhang in plate, which is very different from the very broad context we're seeing at virtually everywhere in the other products. There are some specific instances where there's some excess plate, from an aerospace standpoint, if that answers your question.

Sure. Absolutely. This seems to be very similar to maybe some of the engine suppliers, which I think run a little bit in advance of your cycle. Same commentary they were giving almost six to nine months ago. Do you think -- and you mentioned that this may persist for a little while. Do you kind of have -- can you kind of define maybe how long you see this persisting, this overhang situation in the inventory? Do you have any kind of --

We have much better visibility on the plate because it's more controlled by a handful of OEMs. We expect -- and I'll just talk from a Kaiser standpoint, we're seeing a little bit of impact from these situation-specific issues in the first half. We think that plate demand will be stronger in the second half than the first half, even with some of the seasonality that we see in some sectors in the second half of the year. It's much more difficult to tell in the rest of the supply chain, or the rest of the products. We think there will still be some issues as we get into the second half, although hopefully this starts to loosen up. But there are just too many players involved there. It's really hard to predict where that one's going.

Okay, and last question, if I may, the customer that was willing -- was he willing to make the payment, he or she, willing to make the payment, or was there litigation involved in the particular take? I guess I'm assuming it's a take or pay contract. And then was it a commercial or defense customer?

We said it's an aerospace customer. We probably won't get any more specific than that. It was a take or pay, it's a feature that we have in several contracts. It basically gave them the flexibility to go one way or the other and I think the contract was pretty clear. So it was not that big an issue in terms of talking with them. They just made a choice.

Okay. Thank you very much. Good quarter, guys.

Phil Gibbs, KeyBanc Capital Markets.

Hey, guys. How are you?

Good, Phil.

Just have a couple questions on the industrial, if I may. The industrial pricing looked pretty solid irrelative to what we were anticipating. Given some of these headwinds you're pointing to and the fact that we haven't had restocking, do you expect the pricing discipline of the industry to be maintained in the second half of the year?

Well, pricing has been holding up so far and we see no indications or no reasons that shouldn't be the case going forward. I mean, the one caveat there could be if we got a surge in the underlying price of aluminum, some of the much higher value-added products could get squeezed for a little bit of time. But we don't see that happening either.

Okay. Can you give us an idea of the mix of products in the general engineering basket as far as -- I know plate and rod and bar and extrusions are in there. But I mean, is the plate business half of general engineering? Is it a quarter? Is it more? I am just trying to get a sense of where the exposure is, because I think most of the weakness was more concentrated on the plate side.

No, I wouldn't say that. I mean, there was some weakness in plate, but we certainly have seen weakness in rod and bar as well and in tubing. So it was pretty widespread. I mean, about the only place it didn't spread to, we have some general engineering products that go into munitions and those kinds of things, where we didn't see quite as big an impact.

Okay, and you had mentioned some project-related costs in the second quarter. Is that related to typical maintenance outage activity that you would normally take in the second half of the year, or is that related to some of the things that you have pointed out as growth opportunities?

Well, the -- part of it, a big part of it will be related to construction on the capital projects at Trentwood. So that comes when we determine we need to do it for the capital project. The -- Newark is the other major, what we characterize as major maintenance internally. Typically that would fall in the second half of the year. We're doing it in the second quarter in this -- what we hope is a temporary lull in demand, gives us a nice window to do that besides the need to get this work done. So, the answer is, it's probably moving some of the major maintenance to the left from what we would typically see through the year. We'll have a little bit higher major project expense second quarter than we typically would have in the second quarter.

Okay, and just a last one if I could, Jack, I appreciate that. Just for clarification purposes, on this $4.5 million true-up, was that slowly -- solely related to the first quarter, or did any of that have to do with business that may have shipped in 2012?

It was a multi-year contract and the payment was a payment that we recognized in its entirety in the first quarter. But it was relating to a contract that spans multiple years.

But was it necessarily related to business in 1Q or business that you didn't take from a shipment perspective in 2012? It was just -- it could have been even related to future quarters?

In multiple periods other than the first quarter and other than 2012. So it's basically, you know, similar types of payments that are smaller have happened before. It's just this one called out because it was larger.

I'm just -- I was just trying to figure out, Dan, whether or not it related to business that you did not get from a shipment perspective in quarters past or business that you don't expect to ship in future periods, or both.

Yes, it's -- no, it's actually from years past. So this was a contract that spanned several prior years in a quantity to be consumed during those prior years. And it wasn't consumed. They made a decision, this particular customer, made a decision not to buy the full minimums over that multi-year period. And so this is a payment in lieu of them taking their minimum requirement over that multiple year period.

Okay. Well, thanks for all of that insight. Appreciate it.

David Katz, JPMorgan.

Hi. Jack, it's been quite a while since you worked at that Trentwood facility back in the late 70's, and obviously the facility's changed quite a lot since then. Given the changes that you're contemplating putting through now, I was hoping that you could just give us a refresh on what the capacity is now in advance of the expansion.

Well, first of all, just to correct it, it was the early 80's, not the late 70's. (laughter)

Fair enough.

Actually, the place ran like a Swiss watch back then, back in the early 80's when I was there. It was a completely different facility back in the early 80's. It was a multiple product facility. I would characterize it as all things to all people. We had some defense work that was falling off at the time. The company embarked on a major investment to go into canned sheet. That was in the mid-80's, which we exited when I became involved with Trentwood again around 2000.

So I mean, there's no comparison to what Trentwood was back then to what it is today in terms of product mix, but it does go back to a comment I believe I made on the prior earnings call. We've made a lot of investment at Trentwood over the past five years, and we really upgraded that facility. But we still have a lot of the same equipment at Trentwood today that was there when I was at Trentwood back in the early 80's. And not all of that equipment is qualified to make all of our products, especially some of these more demanding aerospace products, and that's why if you go back to our transcript here in our prepared remarks, you'll see that I said this investment is related as much to flexibility for addressing the product mix as it is to capacity. Because what our folks up there are dealing with today is, as the product mix becomes more and more demanding, not all of that equipment that goes back to my days and even prior to the days that I was at Trentwood, not all of that's capable of handling the full product mix. And so we get into lead time issues and delivery issues and capacity issues.

Depending on what mix of orders happens to come in for a certain month or quarter. So -- and that's why we chose projects from both of the envisioned phase 5 and phase 6. Part of this was to get capacity, but just as importantly, it was putting projects into the mix here that give our folks up at Trentwood more flexibility and more capability to address this very demanding product mix that they are producing.

Okay. So when you -- I take your point that flexibility is important and that therefore, it's difficult to put an exact number on the capacity. But is it -- could you kind of ball park it for us in terms of an average quarter, what the facility's capacity would be?

No, we -- we don't disclose those numbers. And frankly, it is mix-specific. But we don't publish those numbers.

Okay, and then when looking at the increase in flexibility that you will obtain, is that just -- it will allow you to respond to market in terms of if there's a low on-demand in one type of product, or will it also, do you think, increase the value-added revenue that you achieve?

Well, it depends. We think in total, that on average, we're going to get, regardless of the product mix, order of magnitude a 10% increase in value-added revenue. That's what the capacity will be if we were running at capacity. But what it does, it will give us efficiency or if we hadn't done it, there were periods where we can't run anywhere near capacity because an order mix could come through that requires us to idle a whole bunch of equipment that's not capable of processing that product mix. So we sit there with a hot line that's starved for material because we can't preheat the ingot because we don't have enough furnaces capable of preheating the ingots for that type of product mix. So that's why a big part, we're adding some heat treat furnace capacity, which are just processing capacity of plate after it's been hot rolled. But a big part of the investment is in the treatment and preheating of the ingots, giving us greater capability to preheat the more demanding products as they go it through the hot line.

Okay.

Does that answer your --

It does, but I guess if I could just, one last attempt --

Sure.

-- what do you expect the payback on the project to be, the payback period?

Yes, that's a good question, too. What we've said progressively as we've gone through the multiple phases here, for example in phase 3 and we said it again on phase 4, that these projects have become slightly less capital-efficient with each project, and the same is true here. So this is a little less capital efficient than the programs that we've done in the past, but on the other hand, these are still very attractive projects, well above our cost of capital in terms of expected return and frankly considerably better than doing an acquisition. So these are good, attractive investments from a return standpoint.

Okay. Thank you.

Steve Levenson, Stifel Nicolaus.

Thanks. Good morning, everybody.

Good morning, Steve.

I'm sorry, I'm going to go back to the take or pay agreement again. Is the payment a negotiated amount or is it a mathematical calculation that's built into the contract?

It's the latter. So basically the contract had terms and conditions and they followed the contract.

Okay. That's good. Thank you. And does that contract -- is that still in effect, or is there a new contract now?

No, it -- we have -- this one in particular was -- that was the end of the contract.

Okay. Did that customer renew?

We don't -- pardon me?

Did that customer renew or enter into a new one?

No, we just -- Jack said it best before that our forecast is intact. We don't have concerns about what's going on with our plate forecast with the mix of contracts that we have going forward.

Okay. That's good. Thank you. And given your capacity utilization right now and the supply and demand situation, what is the direction you see for value-added revenue? I know you just mentioned about going up 10%. I don't know if that's per pound, if you meant per pound, or if that's, you know, in the aggregate. And I was just curious as to what you saw the direction per pound over the rest of this year?

Over the rest of this year? I mean, that will be mix-specific in terms of what happens. But most of the business is on contract, other than a small portion that's spot business that could be subject to fluctuations in metal prices, for example. But other than changes in the product mix, we don't know of anything right now that should change the direction we're headed in terms of pricing this year.

Okay. Thank you.

I'll point out, though, that if you look at the aerospace in the first quarter, that's obviously impacted by that $4.5 million on a per-pound basis.

Right, got it. Last one, the new automotive program that you mention, is that a supplemental application, or is that an expansion of current applications?

It's -- it will be both. These are multiple programs. We've produced a lot of bumpers in the past, and we're continuing to book new bumper programs that are model-specific. And we'll be launching those. We also have some programs for structural components, and some of those will be new and unique compared to what we've done in the past. But within our capabilities as well.

That's great. Thanks very much for the additional detail.

(Operator Instructions)

Lloyd O'Carroll, Davenport & Company.

Hello, Jack.

Yes, Lloyd.

I was speaking with a private extruder earlier this week and they were talking about market behavior in March and April that basically ingot was dropping like a stone and with the 30-day lag, you know, pricing for product, that a number of customers were pushing orders out of March and into April. And so March was down big and April has rebounded strongly. Are you seeing, or have you seen that kind of behavior in that market?

We saw some of that in March of orders being pushed out, but I have to say that it hasn't had a major positive impact on what our expectation is for the second quarter.

Okay. I just wanted to see if these guys were seeing something different than you.

Yes.

Okay. Appreciate it.

Okay. Thanks, Lloyd.

Yes.

Phil Gibbs, KeyBanc Capital Markets.

Hey, guys. I just had a follow-up. I was looking at, you know, the numbers here a little bit, a little bit closer, and your guidance is a value-added revenue for the first half of this year will be relatively flattish versus 2012. So assuming that you don't have another true-up payment that would imply a pretty sizable lift in value-added revenues on a sequential basis excluding that, something like 5%? Am I thinking about it -- am I thinking about that the right way?

Yes, you're taking us too literal. We --

Okay.

The order of magnitude we're going be in the same ball park. But --

Same ball park, okay.

If you push me to it, I would say if you take out the $4.5 million and put the two quarters together this year, it will be lower than the two quarters last year in value-added revenue.

Okay.

Yes.

Okay. That makes a lot more sense. I appreciate it.

Okay.

It appears there are no further questions at this time. Mr. Hockema, I would like to turn the conference back to you for any additional or closing remarks.

Okay, great. Well, thanks everyone for joining us on the call today, and thanks for the good, in-depth questions. I think it gave us an opportunity to put a lot more color on the situation. We look forward to updating you again on our second quarter call here in July. Thank you very much.

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