Kaiser Aluminum Corp (KALU) 2014 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Kaiser Aluminum first-quarter 2014 earnings conference call. Please note this conference is being recorded. At this time it is my pleasure to turn the conference over to Ms. Melinda Ellsworth. Please go ahead, ma'am.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's first-quarter 2014 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 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 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, 2013. The Company undertakes no duty to update any forward-looking statements to conform the statements 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 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 to turn the call over to Jack Hockema. Jack?

Thanks, Melinda. Welcome to everyone joining us on the call today. Our first-quarter results reflected near-record total shipments and record heat treat plate and automotive extrusion shipments as we continue to benefit from investments that we have made in recent years. As anticipated, although we experienced competitive price pressure on our heat treat plate products, strong volume and improved underlying costs in the first quarter compared to our second half 2013 run rate served as an offset to the lower heat treat plate prices. Our manufacturing efficiency again to recover as we experience less interference from the construction projects and encouraging initial benefits from the ramp-up of phase 5 at Trentwood.

While the net effect of our sales and underlying costs was essentially equal to the second half of 2013 run rate, first-quarter adjusted EBITDA was negatively impacted by approximately $5 million of additional expenses including higher weather-related energy costs and annual fund-loaded accruals for certain employee benefits.

Overall, our outlook for the second quarter and full year 2014 is unchanged. The $5 million of incremental costs incurred in the first quarter are not anticipated to continue. And we expect the second quarter results will be similar to the second half 2013 run rate. We also expect that the full-year 2014 will be similar to our prior-year 2013 results. We anticipate that the second half of this year when compared to our results in the first half will benefit from the combination of lower major maintenance expenses steadily improving manufacturing efficiencies. On that note I will turn the call over to Dan for further discussion of the first quarter results, and then I will provide additional comments regarding our near-term outlook.

Thanks, Jack. In line with our expectations, total value-added revenue in the first quarter was $186 million, which was up slightly from the run rate of the second half of last year. Aerospace and high-strength value-added revenue in the first quarter was down approximately 4% compared to the second half run rate, primarily reflecting the pricing pressure from the aerospace plate inventory overhang that Jack mentioned.

We continue to see a nice increase in value-added revenue for our automotive extrusions, however, which grew 20% from the second half 2013 run rate to a new quarterly record as new programs continue to ramp up. First-quarter general engineering value-added revenue increased 11% compared to the run rate of the second half of 2013, reflecting normal seasonal improvement in shipments across most product categories, which more than offset pricing pressures on general engineering plate.

As Jack also mentioned earlier, adjusted EBITDA in the first quarter of 2014 reflected the pricing pressure and heat treat plate products, which, compared to the second half of 2013 run rate, was largely offset by higher volumes, modestly improved manufacturing efficiencies, and improved underlying costs. However, adjusted EBITDA in the first quarter of 2014 also reflected approximately $5 million of incremental expenses compared to the run rate of the second half of 2013. These higher expenses included annual frontloaded benefit accruals of approximately $3 million for 401(k) contributions and healthcare savings programs that require accounting recognition in the first quarter of each year.

Additionally, we incurred higher energy costs of approximately $2 million related to the severe winter weather earlier this year. And we do not expect similar expenses for employee benefits or higher energy costs to occur in the remaining quarters of 2014.

Slide 7 shows quarterly consolidated financial highlights. Consolidated operating income as reported of $32 million in the first quarter included approximately $3 million of non-run rate games, which are detailed in the appendix. Adjusted for these non-run rate games, first-quarter consolidated operating income was $29 million. Compared to the second half 2013 run rate, adjusted consolidated operating income in the first quarter declined $5 million, primarily due to the incremental expenses related to employee benefit accruals and higher energy costs that we previously discussed.

Compared to the first quarter of 2013, adjusted consolidated operating income in the first quarter was down approximately $12 million, reflecting the following: $4.5 million of revenue and operating income recorded in the first quarter of 2013 related to our contractual payment from a customer in lieu of fulfilling minimum volume requirements; $3 million of higher planned major maintenance expenses incurred in the first quarter of this year; $2 million of higher energy costs; and $2 million related to lower pricing on heat treat plate, partially offset by higher overall volume and improved underlying costs.

Reported net income for the first quarter was $16 million or earnings per diluted share of $0.85. Adjusting for non-run rate items, first-quarter net income was $13 million or adjusted earnings per diluted share of $0.72. Adjusted net income in the first quarter of the reflected higher costs and pricing pressure and heat treat plate that we previously discussed as well as higher effective tax rates compared to both the second half 2013 run rate and the prior-year first quarter. And as a reminder, our effective tax rate in 2013 was favorably impacted by several Canadian tax benefits. For the first quarter of this year our effective tax rate was approximately 37%, which is more consistent with our statutory rate. But as we continue to use our net operating loss carryforwards and other tax attributes, our cash tax rate plans in the low single-digit percentages.

During the quarter, we funded approximately $15 million of capital spending, primarily related to the completing of the phase 5 heat treat plate expansion and the new casting complex at our Trentwood facility, and we also paid $16 million to the VEBAs with respect to our 2013 variable contribution.

Additionally, we returned approximately $20 million of cash to shareholders through quarterly dividends and share repurchases. Cash, cash equivalents, and short-term investments totaled approximately $290 million at quarter end. And now Jack will discuss demand trends and our business outlook. Jack?

Thanks, Dan. Turning to slide 8 and a discussion of our aerospace and high-strength products, we continue to experience the effect of excess supply chain inventory. For aerospace plate and consistent with our theme over the past few earnings calls, we expect the supply chain inventory overhang to persist the remainder of this year. For us the major impact of the destocking is from competitive price pressure on heat treat plate products.

For other aerospace products we are beginning to experience modestly improving demand and indications that the supply chain is slowly coming into balance. One exception to that is aerospace extrusions, where the inventory overhang is greater than previously believed and is expected to depress demand through the remainder of 2014. It is important to remember that, while the excess inventory in the supply chain has the effect of reducing demand for our products, real demand is driven by build rates that continue to grow with the support of the record order backlog for air frames. We maintain our view that most of the impact from excess inventories will abate by the end of the year, enabling us to experience the benefits of strong real demand for aerospace by 2015.

Turning to slide 9 and the automotive outlook, we expect that second-quarter value-added revenue for these products will be similar to the record first-quarter pace. We have several product launches in progress for crash management systems and various structural applications scheduled to come into production later this year. With the strong pipeline of opportunities for new automotive programs, we anticipate that our content per vehicle will continue to grow over the long-term.

Slide 10 addresses our outlook for general engineering applications. We anticipate that demand and pricing in the second quarter will be similar to the first quarter with continuing competitive price pressure on heat treatment plate products.

Slide 11 summarizes our short-term outlook. We expect to benefit in the second quarter from completion of Trentwood's two major investment projects. We are encouraged by the initial results from the phase 5 expansion with record heat treat plate shipments in the first quarter, and we look forward to the end of construction and the commission of the casting complex in May. As we proceed through the launch of these major investments, while the initial benefits will be modest, we expect growing benefits throughout the second half of 2014 and into 2015.

Also we noted on the previous earnings call our planned major maintenance spending is atypically weighted to the first half this year and that will continue in the second quarter before declining to a lower rate in the second half. Our current high level view for the second quarter is that value-added revenue will be similar to the first quarter and that adjusted EBITDA margin will be more in line with the second half 2013 pace as the incremental costs incurred in the first quarter are not anticipated to continue.

Summarizing our remarks today, while we have benefited from record heat treat plate and automotive shipments, our first-quarter results were negatively affected by the high weather-related energy costs and the frontloaded annual benefits accruals. Our outlook is unchanged as we expect to achieve full year 2014 results similar to 2012 and 2013. With the completion of major construction activity in the second quarter related to the investments at Trentwood, we expect to capture steadily growing cost and capacity benefits as we progress through the year.

We remain bullish about Kaiser's long-term prospects and our ability to drive shareholder value through a combination of growth and returning cash to shareholders in the form of dividends and share repurchases. Looking beyond 2014, we expect growth from the strong baseline established in 2012 through 2014 as the aerospace supply chain inventory overhang abates and we again realize the full benefits from strong secular demand fundamentals for our aerospace and automotive applications. In addition, we expect to realize growing benefits from our investments in capacity, quality, and efficiency.

We will now open the call for questions.

(Operator Instructions) Steve Levenson with Stifel.

I think this first one is for Dan. What is the change in depreciation going forward, please, as the new facilities go into production?

I'm going to say that we're going to be approaching about $30 million per year. So is that right, Neal? Have you got that handy? $31 million per year. And it will be probably increasing a little bit as the new projects are coming and commissioned.

Okay, thank you. And then when it comes to the overhang in supply chain, is that affect the leadtimes at all? Are leadtimes compressing or are you starting to see the order book grow at all, as some of the metals producers away from aluminum are, for the longer term out delivery, that is?

Yes. We have a pretty good fix on what our shipments will be for this year, for plate in particular, less so for the other aerospace products. So there are no real surprises there. We have contracted volumes. They give us a pretty lengthy leadtime in terms of what their expectations are, and we are progressing along those plans.

Okay, thank you. And when it begins to switch over, I know they are starting to do the work on 777X, when they go from an aluminum wing to composite wing, given that what's in there may not be your materials or maybe and increased use of heat treat plate, do you see opportunities there? Or is it more of a headwind?

We at Kaiser see opportunities from the new 777.

Got it, thank you very much.

Dave Katz with J.P. Morgan.

With regard to the aerospace extrusions that you said that outlook has gotten a little worse and that you expected to remain in that balance, what changed there?

Actually, what changed his all of the suppliers were asking a lot of questions about was going on with demand. And some of the users throughout the supply chain started take a harder look at it, and as they did they discovered there was a lot more inventory there than what anyone suspected. It's just -- as we have said many times, there's a lot of visibility on plate but not nearly as much visibility on the supply chain for these other products. And it's a very fragmented supply chain and it just -- it wasn't discovered until we all started asking what's going on here.

Do you foresee that happening with any of the other products?

No. We are seeing, as I said in my remarks, on the other products we are seeing slowly improving demand, not as rapidly as we thought six months ago or nine months ago. But at least there's a pretty good drumbeat on these other products that is gradually improving here. It's really plate, and we understand that fully, and extrusions, where we've got a new revelation here in the past 90 days on the inventory overhang.

Okay. And then with regard to the $20 million of combined dividends and share repurchases, how do you expect that expenditure to trend over the rest of the year?

Well, I think it's hard to predict what our share repurchase program will be. We certainly know the dividend is on $0.35 per share case, and I would expect, barring the board thinking of increasing it -- I don't think that will happen during the rest of the year -- that that will stay steady.

Share repurchases -- we have the authorization. It was a little lighter this quarter than it was in the fourth quarter. But we will probably take some relatively balanced approach during the course of the year.

And just looking at it on a quarter-over-quarter basis, you indicated that it was a little lighter. The stock rise recently hit a high. So if you were to stay around current levels, do you think that the lighter levels that we saw in first quarter would be a good go-forward metric?

I don't necessarily want to predict our purchasing program. The only thing that we have done and that we have seen in the past is that we have a practice of purchasing more at lower prices and less at higher prices. That's by design. And so you would expect probably that if we had that kind of buying pattern in the future that the volume purchased might depend on pricing.

Okay, thank you.

Phil Gibbs with KeyBanc.

I had a question largely on the non-plate aerospace side. You talked about the extrusions being a bit over supplied at this point. But what other moving pieces are there within the non-plate basket for you?

You mean for what are the products, Phil?

Yes, in the non-plate aerospace products.

It's sheet, rod and bar, and wire, and drawn tube products.

And you are saying that -- you are not including sheet in the plate discussion?

No, sheet is completely separate.

Okay. So the plate, the drawn products, the rod and bar all seem to be moving in the right direction and the only thing that you see moving in the wrong direction is the exclusion piece.

Yes.

Is that what you are trying to convey?

Yes.

Okay. And as far as putting the balance sheet to work, obviously a lot of liquidity at this point. We've already established the dividend and what you may or may not do on the share repurchase. But what may be of interest as far as maybe aggressively trying to grow some other pieces, parts to the business?

Well, our priorities remain the same, Phil. Our first priority is organic investments, and we continue to think we have good opportunities to improve our operations and grow with the markets. So that's the first priority. And then beyond that we continue to look diligently at acquisition opportunities, but again we are very disciplined and very focused with a pretty fine screen on what we look for there.

Now, for you are there any aluminum lithium opportunities either in plate or maybe rod and bar? Is there anything in the market happening in those applications, or do you have the ability over the long-term to tap into anything that may happen there?

Yes. Other than plate and some sheet opportunities, it's mostly extrusions in the other products. There are some extrusion opportunities potentially as we go forward.

Is that a very big market?

The extrusion market is a pretty big market in aerospace. If you put sheet and plate to flat rolled together --

I don't mean to interrupt you, Jack. But I just mean on the aluminum lithium side.

Oh, yes. It will be a growing market, but the plate market is not a very big market right now, either.

Okay, thank you very much.

Josh Sullivan with Sterne Agee.

Just looking on the aero high-strength pricing here, I know you had previously pointed to looking at the last cycle is where it could trough out. And it looks like at $1.87 here, we are kind of near that level. How do you see that pricing as best as you can throughout the year? Is this the worst of it? Is it going to flat line here? Or what are you thinking about pricing there?

Well, there are two factors here. One factor is what's happening to pricing on heat treat plate. And we have discussed that at length, that we have seen price pressure there. But the other factor is mix, and product mix within that category. And I just answered the question is terms of what some of those other products are. Heat treat plate is, by a significant amount, the lowest price per -- value-added price per pound in that category of products. And as you move up the value chain, rod and bar is higher; sheet is higher. And then you get into wire and drawn products and extrusions. They can be three or four or five times per dollar per pound what plate is.

And so as we get into a situation where there's pressure on extrusions, for example, downward volume, and we continue -- as I said, we had record he treat plate shipments in the first quarter. As our plate shipments continue to grow, that has the effect of degrading the mix. So we don't see, I don't see any real significant changes in pricing as the year progresses other than what may cause some volatility there based on whatever the product mix is in a given quarter.

Okay. And then I guess, conversely, on the automotive side, at $1.13, I think two quarters ago you said that might be the max of what you could get. Is that still the thinking? Or could we see upward pressure there?

No. Again, it's a product mix issue. And of the products that we make, driveshaft tubing, which is a pretty mature market, is by far the highest value-added revenue per pound in that mix of products. And because it's -- first of all, it's a seamless drawn tube with additional fabrication in contrast to most of the other products, which are basically extruded solids or hollow type products. So they are much lower value added. And the growth is in those lower value-added dollar per pound categories. So over time the good news is we will see our shipments growing, we will see our value-added revenue growing. But the value-added revenue per pound should decline over time as we introduce more of these lower value-added products to the mix.

Okay, great. Thank you.

Lloyd O'Carroll with Northcoast Research.

Can we parse the plate pricing a bit between [2N7] aerospace and 6061 general engineering? What's happening on the two sides? And I suspect general engineering overwhelms that, but I would like to have your thoughts on that.

Certainly there's a lot of pressure on general engineering. But on the last call, Lloyd, we actually put a chart in the deck that had two components, one talking about de-stocking. But the other component was talking about the mix in place products between spot pricing and contract pricing. And as you know, the general engineering is virtually 100% or 95%, 98% spot business. So virtually all of that product is susceptible to spot pricing, and more like a quarter to a third of our aerospace plate is spot or transaction pricing. We are seeing similar pressure, frankly, on aerospace plate spot pricing as we are in general engineering plate. But unfortunately there doesn't seem to be a good bottom forming there. Some people just chasing volume and throwing some prices out there.

On the contract side we discussed that to some extent on the last call, where all of our contracts, new contracts are in place. So we are today where we are going to be for quite some time. But we also indicated that over the past three or four years we had some pretty significant pricing, one example Dan just alluded to, first quarter last year we had a $4.5 million payment related to a volume shortfall at an individual customer. We had similar shortfalls that didn't show up in lumps but that showed up in significant incremental pricing per pound over an extended period of time, due to volume commitment shortfalls.

We are now operating at a much higher volume right. And we expect we're going to continue for the next several years at that high-volume rate. So part of what we're seeing in price is that we don't have some of the volume pricing penalties in the contract mix, if you will, that we had historically. So you put all that together and come back up for air, we've got pressure on spot pricing. We have the implications of no big volume penalties that were in there over the past few years and good, solid steady long-term pricing on the contract business as we go forward. Order of magnitude, we have quantified that. It's around the 1.5% to 2% of our total value-added revenue. And that's where we came in in the first quarter, and it looks like that's where it will be in the second quarter, and probably for the remainder of the year, somewhere bouncing in that range, unless something significant changes, which we don't anticipate this year.

Okay. So looking forward I guess I can see that as the supply chain in aerospace excesses worked off, that sometime late this year or first half of next year, that could be over and spot aerospace could be back up to more normal levels. But general engineering is a different animal, and that could persist for a while?

I think that's accurate, although we hope to see some improvement in both categories. Typically, when we see volume firm in aerospace it does have some effect on general engineering, maybe not as direct. But indirectly, there usually is a benefit there as well.

Yes, yes, healthier global economies would help that.

Exactly, exactly.

Okay, thank you.

Sal Tharani with Goldman Sachs.

I just want to understand the guidance, when you give out as similar -- is it similar, the EBITDA margin? Or is it the dollar revenue or operating profit? What do you mean by that?

The comment that I made is that we expect second-quarter EBITDA margins to return to the neighborhood that we were running the second half of last year. The adjusted EBITDA margin as a percent of value-added revenue.

Got you.

And second half of last year, that was around 22.5 or so.

And you expect the revenue -- the revenue is the same as first quarter? Is that correct?

Yes, value-added revenue is similar to the first quarter. And EBITDA margin in the same neighborhood as where we were second half last year.

Okay, got it, thank you. Also I look at your automotive business and it has been growing pretty steadily in volume. And I understand that the product mix will change. But I was wondering if you are growing at the same rate as the market share or are you actually gaining more market share as you are introducing these new platforms?

We believe that we are gaining share. And we believe that will occur -- it has been occurring. If you look at the past 10 years or so, industry demand for automotive extrusions has grown at about a 4% compound growth rate. We have been growing at a 6% or 7% compound growth rate. The projections going forward, which we think are conservative, is that industry demand will grow at 5% growth rate. And we fully expect that we're going to grow at a greater than 5% compound growth rate in our content per vehicle.

Got you. And is it more acceptance from the -- what we used to be called [trans] power plant plans, or is it -- are the big three, or all of them are moving towards more aluminum extrusions?

Well, what's produced in North America, which is our market -- we are seeing it across the board.

And any more thoughts on the [Barden white] area from your side?

We continue to evaluate the situation but have not made a decision to pursue it at this time.

Okay, great. Thank you very much.

Edward Marshall with Sidoti & Company.

I wanted to look at the aerospace pricing again, if I could, the value-added revenue per pound. If I look at the 10.5% decline year over year, I just want to know if you could take the two buckets, one being mix, the other being outright price declines -- can you talk about what we have seen in that number already? Mainly as a relates to 10% being one and 90% in the other, if that's possible?

I don't have that off the top of my head. And if I did, I'm not sure I'd want to get that granular. But from an overall standpoint I'll go back to comments that we've made, which is the total impact of heat treat plate pricing has a negative impact on overall total margin, on total value-added revenue, of 1.5% to 2%. So that's $3 million to $4 million a quarter, on the average, is the total pricing impact on general engineering and aerospace plate combined. And so whatever portion of that -- and that includes pressure on spot prices as well as the elimination or the reduced level of all these volume pricing penalties that were embedded in our pricing historically.

So the remainder, then, is mix related. And that will bounce around quarter by quarter. And it can be, frankly, not only just our heat treat or not our total mix of products; it could be the mix of products within the heat treat plate. Some of those sell that much lower levels than other products. So there's a lot of mix, product mix and macro product, and then micro products within heat treat plate, for example, that will influence that price per pound number.

Yes, I understand that. It probably gets really hard to figure exactly which is contributing to the decline there. If I think about where we are today and your comments about extrusions being a higher price per pound -- or value-added revenue per pound, I guess, is a more appropriate way of saying it -- but thinking about it being a lot weaker than you anticipated, I'm curious if that mix shift towards, as we progress through this year, actually have a larger impact on that number in the second, maybe third quarter?

I think our plate -- without looking at the numbers, I think our plate volume is going to grow through the year probably at a slightly faster rate than the rest of the products. And I'm just using the first quarter as the baseline. So I'm getting some heads nodding in here, so --

So if I think about it, and I looked at one of the customers you reported earlier today, and they talked about that the reason why they see some aluminum pressure year, some of which I think they said due to excess mill capacity and higher industrywide plate inventory levels. The second I understand, the latter I understand. As we get back to the excess mill capacity, I'm curious if you are able to define maybe how much excess mill capacity, and I don't mean have to answer that question for them. But do you see that there's excess mill capacity out there? And if so, how much would you claim it to be?

I won't put a number on it. And when we look at it, we look at industry capacity as really two components. There are the first tier -- mature, highly qualified suppliers. And then there are a whole bunch of other people rattling around, trying to get in this business, who are not really proven suppliers. Generally, over the past couple of years, we have been relatively close to capacity with those mature suppliers. And now with destocking we are seeing some indications that those mature mills are not full, just what we are seeing in the marketplace with some of the pricing actions that some of our competitors have taken. So that's an indication that even some of the mature mills are not there. But then the wildcard is some of these second-tier producers that aren't qualified on very many products but are seeking to get qualified, who also create some issues. And there is some excess capacity there.

I expect, we expect that next year the mature mills should be very well utilized. And then it becomes a function of where is the rest of the crowd here. And that's a wildcard that I can't answer.

But I guess, based on that comment, then you are not expecting that we should see a recovery to the kind of 2012 and 2013 type pricing, assuming that gap still exists in the marketplace?

Yes. If you go back to the pricing that we had, that included what I have characterized as some low-volume premiums that we benefited from in our pricing. We won't see that level of pricing and the only way we would see that is if we got into a severe downturn in demand. And at that point the pricing will be the least of our concerns. So we don't anticipate that happening. We think we are going to be pretty steady state in terms of demand and pretty steady state in terms of our pricing. We don't see it returning in aerospace plate, return to the levels that we had back in the heyday here, even the 2012 level probably, although we certainly expect it to migrate up some from where it is today.

And then I kind of wanted to talk about, just broadly speaking, markets that you play in. Generally I always think of you as the US automotive producer, to the automotive production chain. Is it something that you've considered, maybe even some of the foreign producers, if they incorporate maybe some aluminum into the market? Are there other markets outside of automotive that you might be considering potentially, in energy or other industrial equipment that you may find uses for (inaudible) or aluminum products?

Certainly, we look at those. But at this point the big drivers for us as we go forward will continue to be -- it's not just US automotive. It is North American automotive, so it includes Mexico and Canada as well. And then the global aerospace.

Okay, all right. I appreciate it, guys. Thanks.

Timna Tanners with Bank of America.

I just wanted to take a step back because we get this question and I wanted to revisit it maybe on the aluminum side. I'm hearing that there's some problems passing through the Midwest premium. It doesn't seem like you have that, but I just wondered if you could remind us about how that affects you, if it does at all, given the strength there that's sustained.

And then secondly, just because you had put the MSCI data in your slide deck, is some of what's going on in the aluminum restocking because the price has risen and that usually drives service centers to restock? So just those aluminum questions.

Let me address the restocking first of all. You are talking, I presume, about the rod and bar MSCI chart that's in the appendix. Real demand was reasonably strong for rod and bar in the first quarter, as shown by the service center shipments. And some of that may have been restocking the pipeline downstream from them. But then there was significant restocking or a pretty significant inventory build in the distributors as well. So it was a nice first quarter for rod and bar, probably better than what we saw in our other general engineering products. It was a decent first quarter, but rod and bar was exceptionally good if you go post recession.

I don't put a lot of credence in that. It's extremely volatile. If you go back to 2010, 2011, and 2012, we had false starts three years in a row where everything looked good and everybody -- it was the end of the recession, we are going to have a robust recovery. And then every began unwinding in late second quarter or third quarter. So, I'm not hearing many hurrahs out there other than it was a nice quarter in rod and bar but don't take it to the bank. Demand is reasonable and we are seeing the continued very slow growth in the recovery of the industrial economy to where we are now back up to 2005, 2006 levels of demand.

Okay. And then on the Midwest premium question?

The Midwest premium -- we passed through the LME plus the Midwest. So in our pass through contracts we are not affected by the Midwest premium. So what we look at is the total cost of aluminum including the Midwest premium. And we pass it through. In most cases the one area where there potentially can be some lags in the very high value-added products that don't move on a month-to-month basis as our contract business and lower value-added products do.

Okay, and then last question -- just since we got a chance to check in with you, anything that you are thinking on the further outlook to expand it in Spokane, the Trentwood, beyond what you have delineated for us in further expansions?

That's a good question. If you go back to when we announced what we call now phase 5, phase 5 was really phases 5 and 6 combined. And while we really didn't need the capacity to satisfy what we thought demand growth would be, the capacity from what then was phase 6, we put phase 5 and 6 together because it was much more capital efficient to do so and because there were some operating advantages of combining those two projects. So, we put in capacity that we think is going to last us for while. I don't know what a while is, but right now we don't have any active plans for the next phase of capacity, although it's certainly -- we've got a couple more phases in our five-year plan. It's just a matter of monitoring where the market is in deciding when is the right time to pull the trigger on the next phases here.

Okay, thanks a lot.

Tony Rizzuto with Cowen and Company.

I just wanted to follow up with Timna's question a little bit. It sounds like, given your comments that you've made today during this call, are you a little bit less enthusiastic on the margin, though, about pursuing further expansions beyond five and six?

No, not at all. It's very consistent. We said it when we announced phase 5. We said that was really two tranches of capacity combined, and we didn't need the second tranche. But it made sense to do it now. And we have been doing these like once a year we've put in another 5% or 10% of capacity. And so this one may last us for a couple of years, but we certainly have the next tranches of capacity in our plan, in our capital plans going forward. We just aren't at the point where we are contemplating pulling the trigger. Right now, we are just focused on bringing this $80 million online and reaping the big benefits that we expect to reap from the $80 million investment that is just now coming on stream.

Okay. On the plate side, one of your major customers and foreign customer for you mentioned today on a call that they don't see the de-stock persisting or feel a little bit more constructive that it's not going to go into 2015. But I didn't really hear that from your comments. And they also seemed to indicate, if I heard correctly, that they look for some moderation in pricing pressures. But I didn't hear that from your comments, either. Could you -- maybe what are some of the differences you are seeing, maybe, that might compared with an important service center customer of yours?

No. Let me be as crystal clear as I can because I do agree with what they are saying. It was subtle in the prepared remarks, but I didn't say heat treat plate inventory overhang going into 2015. We are not as ready as they are to declare that that overhang will be over by the end of the year, but we are hearing exactly the same comments on the street as what they are hearing, which seems to be a lot less pressure on that inventory extending into next year than what we were hearing 90 days ago or certainly 180 days ago. So if there is an overhang in 2015, we think it's going to be really minor. We thought it was going to be pretty minor on the last call, and we think it will be even less of an overhang now and maybe no overhang.

And from a pricing standpoint I think in my comments I may not have been as clear as I need to be. We think we'll start to see some relief on pricing. I don't think we will see this year, but I think we will start to see some relief on spot pricing as we get into next year. We fully expect that we're going to start to see our prices move up over time. I don't necessarily expect that they are going to get back to the 2012 level, but we certainly think that we're going to see some improving prices over the longer term.

That's very helpful, Jack. And just a further question here -- is it possible for you guys to break out for us in your aero and high-strength VAR, broadly by mix according to product shape? That would be extremely helpful for us.

We will take a look at that, but I doubt that we will be doing that, Tony.

All right. Just a further question -- could you give us a sense of -- obviously, following the aluminum industry for a long time, and you've been in the business a long time. The oversupply that you see on the extrusion side -- I'm just trying to gauge how many plants are out there on the aero side? I would presume that it's nothing like to [BMC] overbilled that we saw on the extrusion side. But can you give me a sense of the complexion of the industry landscape?

Yes. I want to make sure I word this correctly. Frankly, it's mismanagement of the supply chain that has created an inventory overhang. Some people well downstream in the supply chain continue to order without realizing what was happening to the amount of inventory that was building up in the system. And it gets back to plate dominates everything that people look at in this part of the industry, and then it gets highly fragmented and it gets a lot less scrutiny on everything else in the supply chain. And extrusions almost become an afterthought. And it wasn't until everybody started asking what in the world is going on here, as extrusions did not recover when the rest of it was recovering, a lot of people started asking and digging deeply into the supply chain. And suddenly there was the discovery that there was a lot more inventory there than we thought.

Shouldn't happen. But it happens. It's just the nature of this industry.

Do you think you guys were partly responsible for that?

No. We just booked orders and shipped the metal. It's the people that put the orders in, not the people filling the orders.

All right. That's very helpful insight. I appreciate it.

(Operator Instructions) Phil Gibbs with KeyBanc.

Jack, you made some comments on the last call about the auto programs and maybe some startup headwinds from that. How did that play out?

Well, we are still in the middle of it. But in the first quarter things went -- knock on wood here because I have a wood table in front of me -- things went pretty well in the first quarter. But there's still a lot of land to cover in terms of these startups. And it's in multiple plants, so there is a significant amount of activity there. But we are very encouraged by how our plants are performing so far on these startups.

What does that really entail? Is it retooling, putting in different dies? What do we think about there?

It's every new program; in the automotive vernacular it's called a P path, which is the preproduction approval process, which is a very, very rigorous process that you go through. So in our case, for some of the programs it does entail us installing new equipment. But then it's going through with the customer this very rigorous approval for us to demonstrate that we have rigorous process capability in place and then to demonstrate that the product as designed and as produced is actually performing the way we expected to, in the process.

And a lot of these are new parts. And so we get into, even though the prototypes have been made, you start to get into the initial stages of production and you discover issues either in our manufacturing or in how the user processes it. So it's just a very demanding process that we go through in automotive. And it's like any -- it's almost like starting up the new equipment at Trentwood. It just -- things happen because you're going into a new product, new processes, new equipment as you go through many of these.

Thanks a lot. I appreciate that view, very helpful. And Dan, last one from me is the non-run rate items, I think you had $3 million on the op level. What was the breakout between the segments, between fab and corporate?

The VEBA is the gain; it was like 5.6, was it, and that is incorporate. And basically everything else was in fab.

Thank you.

Thank you. And at this time, we have no further questions in the queue. Jack Hockema, I will turn the conference back over to you for any additional or closing remarks.

Okay. Thanks, everyone, for joining us on the call today. And we look forward to updating you again in July on our second-results. Thanks.

Thank you. And again, ladies and gentlemen, this does conclude our conference. We thank you for your participation.