Kaiser Aluminum Corp (KALU) 2015 Q2 法說會逐字稿

Good day, everyone, and welcome to the Kaiser Aluminum second-quarter 2015 earnings conference call. Today's call is being recorded. At this time, I would like to turn the presentation over to Melinda Ellsworth, Vice President, Investor Relations and Corporate Communications. Please go ahead.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's second-quarter 2015 earnings conference call. If you have not yet seen a copy of our release, please visit the investor relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation we're using 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, 2014.

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. Any reference in our discussion today to EBITDA means adjusted EBITDA, which excludes non-run rate items for which we have provided reconciliations in the appendix.

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 results for shipments, value-added revenue, and EBITDA were all records for any previous three-month, six-month, or 12-month period and were achieved despite heat treat plate prices significantly below the 2012 and 2013 levels. Strong secular demand growth for our aerospace and automotive applications, plus continued improvement in manufacturing cost efficiency, drove the record results.

Our investments in prior years have focused on capacity, quality, and efficiency and have enabled us to continue increasing our output to meet growing demand, improve our market position, and mitigate the impact of lower heat treat plate prices compared to prior years.

Looking more specifically at the major drivers of our results, commercial aerospace build rates are continuing at a record pace. In addition, the supply chain inventory overhang that has been slowly abating has now reached equilibrium. Heat treat plate spot prices are slowly improving. While we expect modest improvements in heat treat plate prices continuing into the second half, prices are expected to remain well below the 2012 and 2013 levels, which included significant customer payments related to volume commitments.

Our automotive extrusion content is continuing to expand as we capture and launch new programs for bumpers, chassis, and structural components. In addition, as gasoline prices have declined, we are benefiting from a shift in customer preference toward content-rich larger vehicles. With increasing content and solid North American build rates, we expect to sustain a strong growth trajectory for our automotive shipments.

We also continued to achieve steady improvements in manufacturing cost efficiency and capacity, driven by our strategic investments at Trentwood and across our automotive platform.

While the quarterly results are noteworthy, the six-month and 12-month record results are more meaningful evidence of our improving operating performance, our strong industry position, and the positive long-term trend in market dynamics. We continue to envision a long runway for our business.

I will now turn the call over to Dan for more insight into the results. Dan?

Thanks, Jack.

As Jack noted and as you can see on slide 6, total value-added revenue for the second quarter and the first half of 2015 established new records for the Company, reflecting a 7% increase compared to each of the prior-year periods. The increase in value-added revenue was largely attributable to higher volume across our end-market applications and partly due to modest improvements in heat treat plate prices, coupled with lower contained metal costs on some higher-margin products sold on a spot basis.

Aerospace value-added revenue increased 4% in both the second quarter and the first half of 2015, relative to the comparable 2014 periods, as commercial aircraft deliveries continued to grow and excess supply chain inventories came into balance.

Value-added revenue for automotive extrusions grew 19% in the second quarter and 18% in the first half of 2015, relative to the comparable periods in 2014, as we launched new automotive programs and continued to ramp up on existing programs.

General engineering value-added revenue increased 6% in the second quarter and 5% in the first half of 2015, compared to prior-year periods. The increase primarily reflects a favorable product mix, modest heat treat plate price improvements, and lower contained metal costs.

You may recall that heat treat plate prices have declined significantly from the 2012 and 2013 price levels, which included sizable customer payments related to volume commitments. Comparing the first half of 2013 to the first half of this year, the adverse impact to us of lower heat treat plate prices exceeded $15 million. While we expect some modest improvement in spot pricing, we don't expect to return to the pricing levels of 2012 and 2013. Fortunately, the adverse heat treat plate price impact was more than offset by aerospace and automotive volume growth to achieve record value-added revenue in 2015.

Turning to slide 7, since 2012 strong aerospace and automotive shipment growth, combined with improving manufacturing cost efficiencies, have more than offset the adverse impact of heat treat plate price declines, propelling us to new EBITDA records for both the second quarter and the first half of 2015.

EBITDA of $52 million in the second quarter of 2015 was a $6 million improvement over the second quarter of the last year. Quarterly EBITDA margin improved to 25.8% from 24.4% in the second quarter of last year. Year-over-year improvements reflected a $5 million favorable impact from higher sales, partly due to moderately favorable spot pricing on heat treat plate, and improved manufacturing cost efficiencies.

EBITDA of $98 million for the first half of 2015 improved approximately $15 million over the first half of 2014. And EBITDA margin improved to 24.5% in the first half of this year from 22% in the first half of last year.

Year-over-year improvements in EBITDA reflected a $10 million favorable impact of higher sales, including modestly favorable spot pricing on heat treat plate, and approximately $5 million of improved manufacturing cost efficiencies. Lower major maintenance expense of approximately $3 million offset increases in overhead and research and development expense in the first half of 2015, compared to the prior year.

On slide 8, we show key consolidated financial metrics. Consolidated operating income as reported was $37 million in the second quarter. Adjusting for $7 million of net non-cash non-run rate losses, second-quarter consolidated operating income was $44 million, up $6 million both sequentially and compared to the prior-year quarter, driven largely by higher sales and improved manufacturing efficiencies.

For the first half of 2015, we reported a $422 million consolidated operating loss, reflecting $495 million of non-cash non-run rate losses related to the termination of defined-benefit accounting for the Union VEBA, as we discussed on the last earnings call, as well as $9 million of other net non-cash non-run rate losses.

Adjusted for non-run rate items, first-half consolidated operating income was $82 million, up $14 million from the first half of 2014, reflecting increased aerospace and automotive shipments and improved manufacturing cost efficiencies, as previously discussed, partially offset by $1 million of additional depreciation expense.

Our effective tax rate was 37% for both the second quarter and the first half of 2015. We continue to apply our net operating loss carryforwards, resulting in a cash tax rate in the low single digits.

Reported net income in the second quarter was $20 million, or $1.11 per diluted share. For the first half of 2015, we reported a net loss of $272 million, or a loss per diluted share of $15.78. Adjusting for the VEBA accounting change and other non-run rate items, net income was $23 million for the second quarter and $41 million for the first half, or adjusted earnings per diluted share of $1.27 for the quarter and $2.27 for the first half of 2015.

Fully diluted earnings per share reflects the estimated impact of net share settled warrants that were issued in 2010 as part of a structure to hedge the conversion premium on our recently repaid convertible notes. At June 30, the warrants had an exercise price of $6.44 (sic -- see Press Release -- "$60.44") per share and approximately 939,000 shares were included in diluted EPS for warrant conversions.

The warrants settle ratably over a period of 120 trading days that began on July 1 and continues through December 18 of this year. Upon exercise, the warrant value is paid in shares of our common stock, based on the market value of our common stock on each exercise date. For warrants that were exercised from July 1 through July 17 of this year, we have issued approximately 100,000 shares.

During the first half of 2015, we paid $14 million in quarterly dividends and we repurchased approximately 552,000 shares of our common stock for $41.5 million. As of June 30, $131 million remained available for further share repurchases under the Board's authorization.

Capital spending in the first half of 2015 was $23 million, related to capacity expansions at our London and Sherman facilities to support our growth in automotive extrusion applications, in addition to other projects across our platform to improve quality and efficiency, as well as sustaining capital spending. We continue to expect capital spending for the full year to be between $50 million and $60 million.

We continue to maintain strong liquidity, with cash and short-term investments exceeding $80 million and revolving credit availability of $267 million as of June 30. As discussed in our first-quarter earnings call, we repaid the 4.5% cash convertible senior notes on April 1 with $179 million of cash on hand and $95 million of proceeds from settlement of the option assets used to pay the conversion premium on the notes.

Cash generation of our business remains strong and we continue to maintain financial flexibility to support further investment in attractive projects for long-term value creation, while also returning cash to our shareholders through share repurchases and dividends.

And now, Jack will discuss market trends and our outlook. Jack?

Thanks, Dan. Just a quick comment for the record, the exercise price on the warrants is $60.44.

Is that what I said?

And not $6.44. It is $60.44.

Thank you.

Turning to slide 9 and our outlook for aerospace and high-strength applications, the supply chain has reached equilibrium after an extended period with an inventory overhang. Our heat treat plate order book is strong and our lead times for these products now extend into 2016.

We continue to anticipate 2015 year-over-year shipments and value-added revenue growth for these applications in the range of 6% to 8%, driven by higher commercial airframe build rates, plus the elimination of drag associated with the prior supply chain inventory overhang. In addition, we expect modest benefit continuing in the second half for spot market sales of heat treat plate, reflecting the improved pricing environment and lower contained metal costs.

Regarding automotive extrusions, we are raising our outlook for value-added revenue year-over-year growth to 20%, up from our prior estimate of 15%. A key factor driving the improved outlook is the shift in consumer demand toward larger vehicles, which have more Kaiser pounds per vehicle content than smaller models.

In addition, F-150 production is ramping up as expected.

As a consequence, we continue on a strong growth trajectory for automotive extrusions with a healthy pipeline of new programs, a favorable mix of vehicles, and North American builds projected to reach 17.5 million in 2015.

Turning to slide 10 and our outlook for general engineering applications, as a consequence of tepid first-half demand that led the flat year-over-year shipments, we are reducing our expectation for shipments growth in 2015 for general engineering to 2% to 3%, a slight adjustment from the previous outlook for 3% to 4% improvement.

In addition, we see evidence of increased import activity for general engineering plate that portends increased competition for orders in 2016.

Turning to slide 11 and a summary of our outlook, we remain optimistic as we expect strong demand growth particularly for aerospace and automotive applications. With the improved automotive outlook, we are raising our value-added revenue year-over-year growth expectation to 7% to 9%, compared to the previous outlook of 6% to 8%. We also expect continuing improvement in manufacturing cost efficiency as we continue to reap the benefits of investments in Trentwood's Phase 5 capacity expansion and new casting complex, as well as our investments in our automotive extrusion facilities.

In addition, we expect to realize modest benefits from lower contained metal costs and improved heat treat plate spot prices.

As Dan mentioned, our major maintenance spending was unusually low in the first half and we expect that second-half major maintenance spending will be significantly higher. Included in the preventive maintenance activity is an extended 10-day planned outage on the hot line and large stretcher at Trentwood in the third quarter that will impact both throughput and cost efficiency. During the outage, we will also modify hot line equipment in preparation for a future Phase 6 expansion of heat treat plate capacity. While we continue to evaluate the timing for Phase 6, these modifications will reduce the required downtime when we eventually proceed with the installation.

In addition to the 10-day planned outage at Trentwood, we expect normal seasonal demand weakness in the second half. Our outlook for 7% to 9% year-over-year value-added revenue growth in 2015 includes these considerations.

Turning to slide 12 and a summary of our remarks, in the second quarter we achieved numerous new records for three-month, six-month, and 12-month trailing results, including record shipments, value-added revenue, and EBITDA for each of those periods. While we expect some impact from normal seasonality and major maintenance projects in the second half, we have raised our outlook for 2015 value-added revenue. We remain optimistic about full-year 2015 results, driven by strong demand, increased production capacity, and improving manufacturing cost efficiency.

Lastly, we are well positioned for continued long-term growth in shareholder value creation. Topline growth will be facilitated by strong secular demand growth for automotive and aerospace applications, and with additional investments in production capacity, efficiency, and quality, we will continue to capitalize on these growth opportunities.

We will now open the call for questions.

(Operator Instructions). Edward Marshall, Sidoti & Company.

So I guess my question is, look, margins, EBITDA margins, operating margins, whatever -- whichever way you want to look at it, were really strong. This is, what, I guess your best quarter I have seen. Can you tell me what the progression here looks like on a go-forward basis? I mean, it does sound like there is a step down in the second half around some of the maintenance trends, but is this the new run rate as we look into 2016 or was there something exceptional in the quarter? Can you help me -- walk me through that a little bit?

We never put a lot of credence in any individual quarterly numbers. Six-month numbers are more revealing in terms of what trends are. There's just a lot of volatility in any quarter.

As you know, we are benefiting from operating leverage from the higher sales. We are getting improved cost efficiency, but, as Dan mentioned, in the first half we also had $3 million lower major maintenance expense compared to the prior year, and typically the first half is lower than the second half of the year. So, the margins were inflated. If you look at a full-year margin, they were inflated by lower major maintenance costs as well and the typical higher sales in the first half of the year than the second half of the year.

So, no, we are not at -- we wouldn't expect that the second-half pace is the pace that we are on for 2015. However, we continue with our outlook that our margins should get into the high 20s as we move forward over the years with increased operating leverage in sales and with operating efficiencies.

Maybe I haven't asked for that definition before and I know you have given high 20s, but when you talk about the EBITDA margin, can we maybe break that down as what percentage of that change is going to be related to the sales volume and what percentage of that change is going to be relative to the operating efficiencies that you put in -- some of the capacity upgrades you have done over the last couple years?

We haven't bifurcated the two that precisely, but more of it would be from operating leverage than from cost efficiency, but both are significant.

Okay. And then, help me understand the boost in the value-added revenue per pound for automotive. I am curious. Is this sustainable at this unusually -- what I consider is an unusually high level for you or is this just some spot market rolling through that boosted that up as we saw higher volume in the larger vehicle?

It is whenever automotive prices change in the short term, unless we signal it, it is because of product mix. And in this case, we are getting some impact, as I mentioned, not only as to value-added revenue, but also the mix is impacted by the shift toward larger vehicles.

As we have gotten the lower gasoline prices, we are -- the industry is selling a lot more trucks. The trucks are more content intensive, and in particular in our automotive product mix, the highest value-added revenue per pound comes from driveshaft tubing, which is extruded tubing, seamless tubing, that is drawn and also is fabricated and has some assembly to it. So it is a significantly higher price per pound, and with the big increase in truck volume and in particular GM trucks, you have seen how much their share, if you follow the automotive industry, how much GM trucks were up in the first half, that's driving a lot of that increase in value-added revenue per pound.

Just to be clear, the driveshaft tubing is related to larger truck vehicles.

Yes, yes.

Okay. And in particular, GM. F-150 as well or no?

I don't think we're on the --

Or the F Series?

Yes, we are not on the F-150. I believe we are General Motors on --

For driveshaft.

For driveshaft, yes. For driveshaft on the F-150, we have structural components.

Got it. Thank you very much.

Tony Rizzuto, Cowen and Company.

I've got several questions here and I guess the first is on China. How concerned are you about China making further inroads into the US market in general engineering plate, rod, and bar? And are you guys seeing what would be tantamount to a flood of Chinese material at this point? Are you concerned about that?

And if you could also address what the quality of that material might be from other sources, other origin, and just a little bit about how your KaiserSelect product is situated and how that might protect you going forward as well.

Gee, anything else, Tony? (laughter)

There are other questions. That was only part one with elements. (laughter)

Let me talk -- speak to -- try to speak to each of those, and remind me if I miss something here.

No problem.

Let me start with rod and bar. That's the simplest answer. On rod and bar, we are seeing some impact from Chinese imports, but it is not significant.

The value added on those products is so low that it is difficult for them, unless they're really dumping and not that they are averse to dumping, but unless they are really dumping, it's very, very difficult for them to get inroads in the rod and bar business.

So, we are not seeing a significant impact there.

In plate, we are seeing a little bit more coming in from China, but, frankly, our comments were more related to what we are seeing from South Africa and from Europe, where we have seen a bigger impact or a bigger uptick in imports leading into next year. So that's really the overall concern. It seems that activity had abated somewhat in the past year or so, and now we see it picking up some.

I think I missed another part of your question.

Quality (multiple speakers)

Oh, quality. Well, I won't speak to others' quality. I will just say that we have demonstrated throughout our product line, not only general engineering products, but also aerospace products, that KaiserSelect does deliver value to our customers.

And that's significant value that is orders of magnitude greater than the price increases that we would charge for KaiserSelect. So, KaiserSelect positions us well in terms of getting market share and defending our position in the marketplace.

Okay, that's great, and I have a question, too, just a little bit further granularity if you could provide on the 10-day outage at Trentwood. I'm just trying to get a better feel for the margin impact and trying to think about -- you guys have given some good guidance, which we appreciate, on VAR growth, but just thinking about margins and partly to Ed's question about trying to gauge that going forward, obviously you had a great level here and you've strung two back-to-back strong quarters together.

Looking at the last half of 2014, a lot of moving parts and it was a relatively low margin. Would it be fair to say that the margin in the third quarter should be maybe somewhere in between the first quarter and second quarter this year or how could you guide us maybe a little bit on that, with respect to that?

The only input I will give there is you will all have your own estimates of value-added revenue and it will be consistent, presumably, with our 7% to 9% outlook for the full year.

But in terms of the major maintenance and the cost efficiency impact from that, it is difficult to precisely estimate how much impact we're going to get from the disruption from a 10-day outage at Trentwood in terms of cost efficiency, but right now we ballpark it in the $7 million to $10 million, compared to the first half, the combination of inefficiencies around the outage, as well as the increased major maintenance costs second half versus first half.

Okay, that's very helpful. And then also if I could ask, are you expecting any further inefficiencies? I know you had some inefficiencies last year as you were ramping into new auto platforms, and given the way these things come together, are you anticipating any further inefficiencies as we look at the third and fourth quarters this year? Maybe new platforms, stuff like that?

Yes, we got -- most of the inefficiencies that we experienced were actually in the first quarter. Our second quarter wasn't quite back to normal, but it was close enough to say that it was back to normal in our automotive operations in the second quarter. So while we are not through all of it, we are clearly through the worst of it, just looking at the numbers here.

Okay. Then alternatively, are you guys -- so -- and you have already worked in, I imagine, you have already worked in that 7% to 9% VAR growth contribution from new platforms as well, as you know them today?

Yes, in fact, the real driver of going from basically the 1% increase in our total value-added revenue outlook is really the change in the mix of vehicles.

We are just getting -- because of the larger vehicles, it is actually our traditional products that are coming in with stronger sales -- antilock brake systems, the bigger vehicles use larger blocks, and so that gives us more value-added revenue. And they use, as in my answer to Ed earlier, it uses more driveshaft, so we have got a big uptick in ABS, antilock brake systems, and in driveshaft, our mature, stable products, just because of the vehicle mix.

Okay, one more question, if I may. We have been talking to quite a few people and some people are becoming more -- a lot of people have become more cautious on the economy, but some people have indicated that maybe there is some looseness in different parts of the US economy. I am wondering. Are you seeing any areas in your book of business, in your end markets, that is giving you any cause for concern at this point? Any change on the margin or any deceleration in any of the end markets that you are serving? Anything to add from that standpoint (multiple speakers)

I would change from cause to concern to is there any reason for optimism, and the answer to that is no. We really don't see anything very positive out there, to speak of.

Even though our shipments were flat year over year and basically in the first half in general engineering, we are still sticking with an uptick in the year, but it is not because we are expecting a robust second half; it's only because we are comparing to a really weak second half last year. So we are anticipating that it is still a pretty slow general industrial economy as it relates to our general engineering products.

Okay, that's fantastic. Thanks for all the color, Jack.

Timna Tanners, Bank of America.

I feel like I ask this every time, but as you keep pointing out, you have a really strong balance sheet, and I know that you are continuing to pursue buybacks and the dividend is at good level. But just can you update us on how you are seeing opportunities for uses of cash currently? And then, I will have a follow-up.

I think they're the same as we have been speaking to for quite a period of time. It's we are focusing on our growth through our organic growth. We are looking at opportunities for external growth, acquisitions, but there is nothing that is of significance that I think is considered actionable that we would pursue right now or be concerned of.

And then, we look at the liquidity of the Company in all aspects, including a downturn that could potentially happen, and back into what we think is excess cash, and that's what we have been using for share repurchases and -- well, share repurchases, anyway. Dividends is an ongoing obligation, in our mind.

And so, it sounds like we can (multiple speakers) -- sorry?

There is really no change.

Okay, so with the announcement that you are pursuing Phase 6, I wondered if that was implicit acknowledgment that maybe more organic opportunities are interesting. So along those lines in Trentwood, can you remind us -- can you give us a little bit more information on what Phase 6 entails, the timing, and then update us or remind us on other phases that you have talked about? Are they still viable and under what conditions do you continue to look at growing Trentwood?

Yes, we haven't set timing for Phase 6. It just so happens that in this extended outage that we have for preventive maintenance here in the third quarter, we determined that was a good opportunity to do some work that will reduce downtime when we eventually pursue Phase 6.

We continue to monitor the market and, more importantly, monitor what customer needs are from Kaiser to determine when we pull that trigger. We believe that we will pull that trigger at some point; we just haven't decided when that is. And we also have Phase 7 identified beyond that, so we know the next tranches of capacity, and when we do those is really a function of the market and Kaiser's situation with the market.

At this point, we continue to stick with what we said earlier in the year that while we are looking at $50 million to $60 million of capital spending this year, over the next five years we are looking at $50 million to $75 million a year, and if we were to guess right now, we will probably be closer to the higher end of that range than the lower end of that range.

So we're optimistic that we still have a lot of really good organic growth opportunities not just at Trentwood. The bulk of the spending this year, frankly, is in automotive, and we expect to continue to see significant spending, capital investments, in the automotive sector as well over the next few years.

Okay, so then just finally on Trentwood, what is the utilization currently and just what helps you pull the trigger on those further expansions? Does it have to do with demand? Does it have to do with your margins? What do you expect to be watching for to make that decision? Thanks.

Well, we are well utilized right now with lead times already stretched out into next year, and early indications are -- part of what gives us confidence that the inventory overhang has abated is that the early indications are that we are looking at a pretty strong order book for aerospace next year, as well.

So we continue to monitor those in terms of what our order book is, but also what the total industry situation is as well and what are the long-term prospects for us, and that ultimately is the determination, us really talking to our customers and getting our own view of the market to make a final decision on when we pull the trigger.

Okay, great. Thanks for that.

Phil Gibbs, KeyBanc Capital Markets.

Hi, thanks for taking my question. Had a question for clarification purposes, did you say that the maintenance disruption at Trentwood would be a $7 million to $10 million headwind second half versus first half? And then, I think you made some other comment after that as far as other efficiency impacts. I just wanted to make sure I got those numbers right because they were meaningful.

Yes, good, I am glad you asked a follow-up so I can be clear on what I intend to say here.

What I intend to say is that we expect a significant increase in major maintenance spending compared to the first half, and that plus whatever disruption that occurs as we do some of this major maintenance, and we have some -- like a 10-day outage at Trentwood, that creates some inefficiencies. We think when we wrap all that together, the total impact second half versus first half is $7 million to $$10 million, with the bulk of that being just the raw major maintenance spending.

Raw major maintenance that you would have had to do anyways or relative to --

Yes, this is -- yes, we had unusually low spending in the first half. We are going to have higher spending in the second half. The full year is going to come out basically in line with where we have been for the last three or four years. So it's pretty consistent spending; it's just lumpier in the second half. Second half is almost always higher than the first half. This year, it's even more so.

So $7 million to $10 million is typically what you would spend on major maintenance in a given year is the way to think about it?

Yes, it is. The $7 million to $10 million versus what we spend in the first half brings the full year to what we would typically spend.

Okay, and that's inclusive of some of the things that you're doing at Trentwood to debottleneck?

There is no debottlenecking. The major maintenance at Trentwood is all related to just basic mechanical and electrical preventive maintenance and on the stretcher. We have got major work that we are doing on both the large stretcher at Trentwood and on several big pieces of equipment on the hot line.

But in addition -- that's not all the major maintenance. As usual, we have a number of furnace rebuilds in melt shops around the system in the second half of the year. It's just typical. As we get into the lower seasonal demand in the second half of the year, we have more opportunity to take equipment down and do preventive maintenance. That's why we generally spend more in the second half than the first half.

Okay, because I know you had made some comments about Phase -- making some room for Phase 6, so I was curious if that was embedded into that or should we see some more of that spending hit the P&L later this year or early next year?

No, I'm going to look at the accounting people when I say this to see if they frown, but the bulk of the work that we will do in preparation for Phase 6 would be capitalized, rather than expensed. So the expense that we will incur is strictly related to preventive maintenance on equipment.

Okay, I appreciate that clarity. And then, the second point or second question, rather, if I could -- I know the first one was multipart, but the 7% to 9% value-added sales growth this year, does that include pricing or is that all volume?

It's everything.

Okay, so pricing is embedded into that a bit.

Yes.

Okay. I appreciate it. Thanks, Jack.

Steve Levenson, Stifel.

You talked about the strong order book on aerospace and I'm just curious if that relates more to the increase in build rates coming up on single-aisle planes and a few of the widebodies or if it is more to do with the unit content.

I think it is more just the build rates in general, but the fact that the inventory overhang has abated, because that was a major drag on demand for the past couple of years. So it's a combination of the overhang abating and then just general build rates increasing.

Okay, thanks, and I know you have said there is really never stability. People are either destocking or restocking.

Yes.

So, I guess what would it take -- is it that there is a lower price? Would that be an impetus for people to add stock or do you think they have figured out where they ought to be and it's going to be a little bit more stable going forward?

I have the same -- I have the concern that you just mentioned, and so I continue to ask the question, have we switched? Have we gone from destocking to restocking here?

At this point, we don't think we're restocking. Not all of the mills have the same lead times that a couple of the major mills do, so it looks like there is sufficient capacity out there that we shouldn't have any kind of a panic on the buyer's part. Because what typically creates the restocking is when you get into these longer lead times like we have, and then people start saying, oh, we need to pile on inventory. We are not sure we can get supply.

We think there is enough industry supply out there to prevent restocking at this point, but these things grow like wildfire some time, so we're going to keep a close eye on that.

Okay, thank you. Last one is I know you showed some products at the air show and I believe some of them were aluminum lithium products. Can you give us a little detail about that product?

Sure. Our position there remains the same. We are capable on aluminum lithium. We're working on some applications for aluminum lithium with certain customers, so we can produce and supply customers. We continue to monitor the market, and if it does become a significant market -- at this point, we don't think it justifies additional investment on our part, but if and when it does, then we would make that move.

Got it. Thank you very much.

(Operator Instructions). It appears there are no further questions at this time. Mr. Hockema, I'd like to turn the conference back over to you for any additional or closing remarks.

Okay, thanks, everyone, for joining us on the call today. We had a pretty good first half and look forward to updating you again on our third-quarter call in October. Thank you.

That concludes today's call. Thank you for your participation.