Kaiser Aluminum Corp (KALU) 2015 Q3 法說會逐字稿

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

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's third-quarter 2015 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'd 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 10K 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've 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've 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 and welcome to everyone joining us on the call today.

Our third-quarter results continued the trend for strong year-over-year improvement and were in line with our outlook for the second half. As we had anticipated, strong underlying product demand and expanding sales margins in the third quarter were partially offset by the impact from planned maintenance at our Trentwood facility on costs, throughput and manufacturing efficiency. In addition, we experienced some unanticipated growth-related inefficiencies in our automotive operations.

Aerospace demand remained strong into the third quarter and automotive demand was (technical difficulty).

During the July earnings call, we discussed preventative maintenance activity (technical difficulty) replacing major structural components on the large plate stretcher, rebuilding two furnaces in the remelt operation and hotline modifications to facilitate a future Phase VI capacity expansion of heat treat plate capacity.

As anticipated -- an anticipated consequence of the planned equipment outage was reduced throughput, and Trentwood's production was down 6% in the third quarter compared to the first-half run rate.

During July earnings call, we also indicated that the estimated impact from planned maintenance expense and related inefficiency in the second half would be as much $10 million compared to the first half of 2015. In the third quarter, we incurred approximately $6 million of this amount and with additional routine maintenance scheduled in the fourth quarter, we are on track with the second-half estimate. The preventive maintenance and related activities at Trentwood were completed on schedule in the third quarter and the plant is back to normal operating performance following the extended outage.

Unanticipated inefficiencies in our automotive operations, while not as significant as the impact from the preventative maintenance, are noteworthy. You may recall that we had inefficiencies in the first quarter with the launch of several new automotive programs for bumpers, chassis and structural components. In July, we stated that we were back on track in the second quarter. Unfortunately, that was a premature declaration of victory as third-quarter cost inefficiency was similar to the first quarter.

In addition to growing pains, as our system adjusts to rapidly expanding volume in multiple facilities, volatile order patterns within the supply chain exacerbated our challenges. Although we expect reduced learning curve costs in the fourth quarter, we have continued to experience volatile and disruptive order patterns in October as portions of the supply chain have not yet settled into a steady rhythm.

Looking ahead, with strong underlying demand and the Trentwood plant equipment outage behind us, we remain optimistic about our full-year 2015 results. I'll discuss our outlook for the remainder of 2015 in more detail, along with a high-level preview of our 2016 outlook after Dan provides additional color on third-quarter results. Dan?

Thanks, Jack. On Slide 6, we discuss the third-quarter earnings relative to the prior-year period. Additionally, since our outlook comments in our last quarterly earnings call were made in the context of the pace of the first half of the year, we also compare third quarter to the quarterly average of the first half.

As Jack mentioned earlier, value-added revenue in the third quarter reflected expanded sales margins due to higher spot prices on certain specialty lawn products and heat treat plate products as well as lower contained metal costs on some high value-added products. Excuse me. These pricing dynamics, as well as favorable product mix, drove a $14 million increase in value-added revenue for our aerospace and general engineering products on relatively flat volume compared to the prior-year quarter.

Value-added revenue for our automotive extrusions increased 26%, or $6 million, in the third quarter compared to the prior year, primarily reflecting higher volume as we launched -- as we continued to launch and ramp up numerous new automotive programs. Overall, total value-added revenue in the third quarter increased 11% over the prior-year period on a 4% increase in total shipments. Compared to the first-half quarterly average pace, value-added revenue for aerospace was relatively flat as lower volume due to the planned outage at Trentwood was largely offset by favorable price and product mix.

Automotive value-added revenue improved 4% compared to the quarterly average base in the first half of the year on moderate volume increases from recently launched programs as well as favorable mix of large vehicle production.

Value-added revenue for general engineering applications declined 2% due to seasonal demand weakness offset in part by favorable pricing mix. In total, value-added revenue in the third quarter was comparable to the quarterly average base of the first half of 2015.

Shifting now to EBITDA, compared to the prior-year quarter, third-quarter 2015 EBITDA improved $4 million as favorable pricing and mix for aerospace and general engineering products along with favorable sales impact from higher automotive volume were partially offset by higher maintenance expense, lower throughput and inefficiencies related to our planned equipment outage at Trentwood as well as launch-related automotive inefficiencies, both of which Jack mentioned earlier. Compared to the quarterly average pace during the first half of this year, third-quarter EBITDA declined approximately $4 million as lower aerospace volume resulting from the Trentwood outage, seasonally lower general engineering shipments and higher costs and inefficiencies at Trentwood as well as in our automotive operations were partially offset by favorable aerospace and general engineering pricing and mix.

Turning to Slide 7, we'll look at the year-to-date period. Our total value-added revenue in the first nine months of 2015 of $600 million represented an improvement of $45 million, or 8%, over the prior-year period. Higher volume, particularly for aerospace plate, as well as improved pricing and mix, resulted in a $16 million increase in aerospace value-added revenue.

Automotive extrusion value-added revenue increased $14 million, or 21%, over the prior-year period, reflecting increased shipments primarily related to new programs that launched over the year.

General engineering value-added revenue improved $12 million, or 8%, reflecting increased spot prices for certain specialty lawn products and heat treat plate products as well as lower contained metal prices.

EBITDA in the first nine months of 2015 of $143 million represented an improvement of $20 million, or 16%, compared to the prior first nine-month period. This year-over-year improvement reflected a favorable sales impact of $26 million. Manufacturing efficiency improved slightly in the first nine months despite the impact in the third quarter of our planned outage at Trentwood and the learning curve and product launch costs at our automotive facilities.

Overhead and other costs increased approximately $7 million compared to the 2014 period, partly to support continued growth in automotive programs. EBITDA margin improved to 23.9% in the first nine months of 2015 from 22.3% in the prior year.

On Slide 8, we shared key consolidated financial metrics. Consolidated operating income as reported of $41 million for the third quarter included approximately $4 million of non-run rate gains. Adjusting for these gains, operating income of $37 million in the third quarter was a $4 million improvement over the prior year. And my earlier comments about EBITDA also explain the year-over-year improvement in adjusted operating income.

The $381 million operating loss reported for the first nine months of 2015 includes $500 million of non-run rate losses virtually all related to the termination of defined-benefit accounting for the Union VEBA in the first quarter of this year. Adjusted for these non-run rate items, first nine months consolidated operating income was $119 million, which was a $19 million improvement over the first nine months of 2014. In addition to the items I previously discussed with respect to EBITDA, the improvement in adjusted operating income reflected $1 million of additional depreciation expense in 2015.

Our effective tax rate was 36% for the third quarter and 38% for the first nine months of 2015. However, we continue to apply our net operating loss carry-forwards, resulting in cash tax rates in the low single digits.

Reported net income for the third quarter was $22 million, or $1.21 per diluted share. Adjusting for non-run rate items, third-quarter net income was $19 million, or adjusted earnings per diluted share of $1.07.

Reported net loss for the first nine months of 2015 of $250 million and loss per share of $14.55 reflected the Union VEBA nonrelated non-cash loss and other non-cash items. Adjusting for these non-cash, non-run rate items, net income and earnings per diluted share were $61 million and $3.33, respectively, for the first nine months of 2015.

Beginning on July 1, warrants issued in connection with our convertible notes began to sell ratably over a 120-day trading period. Upon exercise, the warrant value is paid in shares of our common stock based upon the market value of our stock on each exercise date.

Earnings per share for the third quarter and the first nine months of 2015 reflect shares issued for warrant settlements during the third quarter, and fully diluted EPS reflects estimated shares to be issued upon warrant settlements that are occurring in each trading day in the fourth quarter through December 18.

During the third quarter, we issued 516,000 shares due to warrant settlements, and from the 1st through the 19th of October, we issued an additional 126,000 shares. During the first nine months of 2015 though, we repurchased 599,000 shares of our common stock for $45 million and we paid $21 million in quarterly dividends. Capital spending in the first nine months of 2015 totaled $38 million, and we continue to expect capital spending for the full year of 2015 to be between $50 million and $60 million.

As of September 30, cash and short-term investments totaled $113 million, and cash generation from our business continues to remain strong. Revolving credit availability was $239 million at quarter end, and in the near future, we intend to further enhance our financial flexibility by extending our revolving credit facility beyond the September 2016 maturity date.

Additionally, we anticipate market conditions will allow us to economically refinance our 8.25% senior notes as we approach the first call date of June 1, 2016. With that in mind, we chose to purchase some of our senior notes recently at yields that far exceeded what we otherwise earn on short-term investments.

During the third quarter, we purchased approximately $6 million principal amount of our senior notes. And since quarter end, we purchased an additional $21 million principal amount, leaving approximately $198 million of senior notes outstanding as of today.

As we move into 2016, we anticipate that our strong operating cash flow and liquidity will fund our ongoing business needs, sizable organic investments, and continued cash returns to shareholders.

And now Jack will discuss our business outlook. Jack?

Thanks, Dan. Turning to Slide 9 and our outlook for aerospace and high-strength applications, underlying demand continues to be strong. As I noted earlier, we are on track in the fourth quarter for strong throughput and improved manufacturing cost efficiency at Trentwood, and we expect strong sales for our aerospace and high-strength applications, especially sheet and plate products. We continue to anticipate record 2015 value-added revenue for these applications, at the low end of our outlook for 6 to 8% year-over-year growth. The primary drivers for the 2015 growth in these applications are higher build rates for commercial airframes and reduced drag associated with the prior supply chain inventory overhang. In addition, we have benefited from an improved pricing environment for spot market sales of heat treat plate.

Regarding automotive extrusions, we maintain our own look for approximately 20% year-over-year value-added revenue growth. We anticipate that fourth-quarter demand will be off slightly compared to the third quarter due to normal end of year seasonal demand weakness, although demand within the supply chain for large vehicle components continues to be volatile and unpredictable. Longer-term, we continue on a strong growth trajectory for automotive extrusions with a healthy pipeline of new programs, a favorable mix of vehicles and steadily growing vehicle builds.

Turn to Slide 10 and our outlook for general engineering applications. We anticipate normal seasonal demand weakness in the fourth quarter, although we expect that general engineering plate shipments will increase compared to the third quarter, which had output constrained by the ten-day outage at Trentwood. We continue to expect 2% to 3% year-over-year shipments growth for these applications in 2015. While we expect pricing in the fourth quarter similar to the third quarter for these applications, we continue to anticipate increased import activity next year for general engineering plate that portends increasing price competition.

Turning to Slide 11 and summarizing our outlook, we continue to expect 2015 value-added revenue at the high end of the outlook for 7% to 9% year-over-year growth driven by strong demand for aerospace and automotive applications in addition to some benefit from improved sales margins and lower contained metal costs. In the fourth quarter, we anticipate normal seasonal demand weakness to be partially offset by strong throughput and shipments from Trentwood following the planned equipment outage in the third quarter.

Routine major maintenance expense in the fourth quarter is expected to bring the total second-half 2015 impact for planned maintenance and related costs to approximately $8 million to $10 million higher than the first half of 2015 with approximately $6 million of that impact already incurred in the third quarter. We anticipate that Trentwood's manufacturing cost efficiencies will be back on track, and we expect improvement in cost efficiencies in our automotive operations although volatile and unpredictable order patterns have continued to present a challenge in October.

Looking ahead to 2016, we expect solid year-over-year value-added revenue growth driven once again by higher shipments of aerospace and automotive applications. Our heat treat plate order book is strong and our lead times these products are 33 weeks. Demand for our automotive extrusion applications remains on a strong growth trajectory as we will have numerous new launches in 2016 and expect another year of double-digit value-added revenue growth. Overall, we expect another year strong topline growth and continued improvement in manufacturing efficiencies.

Turn to Slide 12 and a summary of our remarks today. Our third-quarter results reflected strong underlying demand in pricing partially offset by expected costs and inefficiencies related to the extensive planned maintenance and equipment outage at our Trentwood facility. We remain optimistic about full-year 2015 results, which continue to be driven by strong demand in aerospace and automotive applications, increased production capacity, and improved underlying manufacturing cost efficiency.

Lastly, we're well-positioned for continued long-term growth in shareholder value creation. Topline growth will be facilitated by strong secular demand growth for auto 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 up for questions.

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

So, I'm going to ask about the automotive disruptions. Is there any way that you can quantify the drag in the quarter, either from percentage terms or maybe an absolute dollar value?

Yes, it was similar to the first quarter. You'll recall on the call about the first quarter, we indicated that was, order of magnitude, around $2.5 million year-over-year compared to the average run rate last year.

Then in the second quarter, in response to a question from someone, I indicated that the second quarter was pretty much back on track with 2014 overall performance, and then in the third quarter were back to around a $2.5 million order magnitude blip compared to last year's performance.

Got it. You sound a bit gun-shy, but do you think you've got it under control or is it just the erratic and sporadic kind of patterns that are out there, it's just too early to call?

I think it's going to be better. I think that the results we saw in the second quarter turns out were premature. I don't think we'll be back to a 2014 pace in the fourth quarter.

As I mentioned a couple of times in the remarks here, we continue to see very volatile demand. It was multiple supply chains in the third quarter. It's pretty much restricted to one part of the supply chain right now, but it still is very disruptive on our operations. I mean we get weeks where we've got demand 40% to 60% above the theoretical maximum that we've been -- that we're prepared to produce and we'll run at that rate for a couple of weeks and then all of a sudden it's down 40%. So it's obvious that some folks beyond us in the supply chain are going through the same kind of a learning curve here.

So we have our own learning curve issues, and that's the primary issue and we think that that will be better in the fourth quarter. It's just difficult to predict how much disruption is going to continue from these volatile order patterns.

Got it. Okay. And then if I kind of switch gears to maybe value-added pricing and I look at kind of the cycles, and I just wanted to see if I can get a gauge. Is the pricing that you are receiving kind of on the automotive products right now, is that reflective of kind of the intricacy of the products that you're producing or is it more about shortage of material and the call in the material and therefore there is going to be some cyclical pattern and it will eventually kind of rest back down to where we've seen it historically.

Well, automotive is -- what you see if you're looking at value-added revenue per pound for the group of automotive products that we supply, virtually all of the change in that price is product mix related. We have, as we say, in a lot of these applications, we have a wide range of prices from some of our long products value-added revenue in the $0.50 to $0.75 a pound range, and you get up to some complex products like driveshaft tubing is up in the $3, $4, $5 per pound value-added.

So and the real growth -- the drive shaft is a mature product. Antilock brake systems is a mature product, or the blocks for the brake systems, but the big growth is in chassis and structures and in bumpers, and those are relatively low value-added. So as we grow there, you'll see the average value-added revenue coming down, which is not reflective of pricing; it's strictly reflecting mix.

Got it. And then on value-added pricing on aero in the quarter, it looked like it was very, very strong. I presume it was mix as well?

Some of that is mix but some of that is price. There is a little bit of benefit in all of the aerospace and high strength -- or the spot sales of aerospace and high-strength coming from the lower contained metal costs. And there are some actual price increases, relatively modest, but some price increases on spot aerospace plate as well. So it's --

Was that a surprise to you?

No, no, no.

I remember your guidance was up just slightly from previous quarters.

We've been saying modest price increases on heat treat plate as the year went forward. We said we had some in the second quarter, which we probably quantified, I don't remember. And we said we expected some more in the third quarter. So we did get some more in the third quarter, but a lot of what you're seeing there is mix as well.

Okay. And then I guess finally, your comments to general engineering, as I kind of think about increased competition next year, I know when aero plate gets kind of chunky, it affects the pricing on general engineering and when it gets tight, it affects general engineering price. Does it reflect -- does it happen in the opposite way as well? If it's soft in general engineering, it would fall into aero plate as well? Or is it different in that business line? So if there's additional -- go ahead.

Yes, there's some correlation. It's more dramatic in general engineering than it is an aerospace, but there is correlation. They generally go up together; they generally go down together. It's just amplified in general engineering compared to aerospace plate.

And I'm assuming that has to do with the approval processes and so forth of the equipment and so forth?

No, it's the number of people that can play in each sandbox.

Got it. Thanks very much.

Jorge Beristain, Deutsche Bank.

Hi guys. It's Jorge Beristain with DB. I guess my question is just on your guidance on the double-digit value-added revenue growth you're seeing in the auto segment, is that more likely to be driven by volume, or is there a little bit of price still in there? Because you did comment in your guidance that pricing is kind of, if I read this right, stable at this point. But just trying to get an idea of how much of that growth going forward is volume versus price.

It's all volume and, again, any change you see in price will be mix related rather than actual price related.

Great. Could you also give us similar color for the aero as well?

In terms of the outlook going forward?

Yes, in terms of how much is volume versus price?

Well, going forward, I wouldn't -- it's premature really to look that far into next year. But frankly, I don't think we see much price change at all going into next year. So most of what you see there will be mix.

And I'll apply one more caveat there. We are getting some expansion of margin in all high value-added products and spot prices on high value-added, most of which are in the aerospace and high-strength category. And so if we start to see increasing aluminum prices, prior month Midwest prices, we could start to get squeezed. And that's always a function of how much it goes up and how fast it goes up, because there's a lag in how the market adjusts to those changes in underlying metal costs. So there's some risk there as we look into next year if we get a rapid run-up in contained metal costs.

Thanks. My last question is just what are you seeing in the import market and how is there a kind of knock-on effect, particularly for heat treat plate? My concern is China seems to just be off the rails in terms of their year-on-year increases in aluminum output. Obviously, it's been concentrated at the low end, but are we starting to see them move up the value curve? And are we now seeing heat treat plate or stuff that might be used in high-end aerospace applications also under pressure from imports?

Note to aerospace, there's some impact on general engineering, although we put it more into the category of imports rather than China. There are imports from Western Europe and imports from South Africa that, frankly, are a bigger concern to us over the next year or two than anything coming from China.

Got it. Thanks very much.

Steve Levenson, Stifel.

I had a question in relation to your lead times. Can you give us an idea of how the 33 weeks compares to how things have typically been? And can you tell us, does that help you with planning that might eliminate some of the inefficiencies that you've had recently?

First, the lead times are longer than what we've seen in the last three or four years, but we went through a four- or five-year period back from 2005, 2004 or 2005 through 2008 where the lead times were almost infinity. The entire global market was sold out.

In terms of whether it gives us visibility that helps us, the short answer to that is no because a lot of these lead times are just booking a place holder for key customers and they still have plenty of time to decide the specific specification that they're going to order. So there's a little benefit to having the longer lead times, but not a significant benefit.

And at Trentwood, the inefficiency that we had at Trentwood, that was 100% related to the planned outage. We anticipated that, when we had major equipment down for a portion or all of a ten-day period, that was going to be very disruptive in the operations, and it was, but we expect it's going to be right back on track.

Got it. Thanks. Second question -- over the last few days, Boeing and Airbus have both been talking about upward pressure on single-aisle build rates. And if they do move, I know Boeing has already committed to 52 going into 2018 and Airbus is talking about 50. I don't know how much higher they would go. But if they go higher, would that require a Phase VI or even something beyond Phase VI, or do you have enough capacity now?

Well, that specifically by itself certainly factors into the equation, but that won't tilt the balance one way or another. We're looking at the overall situation here in terms of overall demand for the industry, where the other players are, but more specifically what we see as the demand from our customers on our facility to determine when we pull the trigger on this.

Okay, got it. Thanks. Last one -- does Alcoa's decision to separate their businesses -- do you see that helping or hurting anything for you?

No, we did that 10 years ago, so --.

They're a little late.

Pardon me?

They are a little late I guess.

We had circumstances that made it a little easier for us to do it. But others have done it and I've been asked many times the past whether I thought the two should be together or separate. And my answer is they are two completely different businesses. And that's basically what Alcoa has concluded as did Alcan when they split their businesses back 15 years ago as well.

Okay. Thank you very much.

Timna Tanners, Bank of America Merrill Lynch.

So, I wanted to just ask you if you have timing plans for the sixth Trentwood expansion that you were just preparing for with the outage?

No specific timing. We continue, as we've said on the past few calls. We've got everything in place to where we can pull the trigger, so if and when we make that decision, we'll be full speed ahead.

Okay. And I just wanted to clarify some comments you made. You said that you could be hurt by a rise, a rapid rise, in prices. Are you benefiting from any of the precipitous decline in the LME or the Midwest premium?

Yes.

Okay. It didn't sound like you want to quantify that but I guess I'll ask anyway.

You know, I would guess -- if you look at what our pricing was in the third quarter -- and this is just a wag, if you will, maybe a swag -- it's maybe $1 million to $2 million in the third quarter versus what we could see if we get a pretty rapid run-up here over the next several months. But again, it's very difficult to predict. Hopefully, when it starts to go up, it will go up gradually and we'll be able to adjust to it and it won't have a big impact.

Okay, it make sense. The last question I wanted to ask is, hypothetically speaking, if some of the domestic smelters shut in response to the low prices, would that have any impact on you whatsoever in terms of procuring raw materials?

No. We have global supply now, so we're -- and we look at this strategically. So we are very careful in our strategic planning in terms of what our supply base is to make sure that we've got good security of supply. And we are a big, good customer, so we are at the front of the line or near the front of the line when it comes to procuring material from just about any supplier.

Okay, make sense. Thanks guys.

Phil Gibbs, KeyBanc Capital Markets.

I had a question on just the maintenance, the planned and the unplanned piece. So the second half, the top end of that, you're at about $20 million of call it annualized maintenance. How much of that continues with you to 2016? Because I know a piece of that is Trentwood, so just trying to think about that in the right way, obviously keeping them separate from what happened in auto.

I'm not sure where you got $20 million. What we have said --

Run rate, run rate. You said $10 million in the second half, so I'm just (multiple speakers) through that rate?

Yes, the second half, and that was a combination of major maintenance expense as well as the disruption that occurred from the major equipment outage. Typically, for example, in the fourth quarter, if you follow my math, the fourth quarter could be $2 million to $4 million worse than the first half but that will be essentially all expense related to the projects. We don't anticipate any disruption to the operations.

So we do a lot of major maintenance on our equipment and on our facilities around the system every year. Seldom does it have a mentionable impact, but this was such an extensive outage on so much equipment at Trentwood that it had a big dollar impact in terms of our cost efficiencies.

But in terms of our actual major maintenance spending in 2015, we said a few times early in the year that it was rear-end loaded. It was light in the first off and was heavy in the second half. But when we look at the full-year actual expense, it's going to be very similar to actual expense in 2014 with the caveat we had another $3 million or $4 million or so of disruption costs at Trentwood related to the outage, if that all (multiple speakers).

Okay, so some of that $6 million you hid in your release relates to the disruption.

Exactly, yes.

And some of it is planned too though?

Yes, I forget the exact numbers, but a couple of million dollars was the true major maintenance expense in addition over and above what we spent as a run rate last year or first half of the year. But there was around $3 million to $4 million of inefficiency cost at Trentwood related to the major activities that we were undertaking there. I mean the hotline was down for several days. The stretcher was down for several days. So we lost 6% throughput in total, but we also had disruption to the operations. Our flows got disrupted, so it created all kinds of inefficiencies, even on the equipment that wasn't down for the outage.

But that wasn't necessarily a surprise.

No, it was all planned. That was part of that $10 million that we stated on the last call. Good point, Dan.

Right. The only thing that really seemed to be a surprise to you was the automotive piece.

Exactly, that was (multiple speakers)

You called that out as $2 million to $3 million on an annualized basis in Q3, right?

Yes, compared to last year and, frankly, that's my fault. I've been around the block enough times that I should've known that we were going to get bitten yet on that learning curve. The second quarter was too good to be true.

Nothing goes in a straight line, right?

That's right.

Okay. And then, Dan, you had mentioned something on the senior notes. So you have the opportunity to call those in the middle of next year. Is there a penalty to do so, or is it pretty open for you?

Well, there is a built in call premium of 4 1/8%, I believe, if we call in June of next year, it was the first call date. It decreases over the year as we go later. But the economics are, as we see them right now, and the market doesn't move dramatically, we think it would make sense to do something on or before that even to refinance those bonds.

Okay. Thanks so much.

(Operator Instructions). Josh Sullivan, Sterne.

If we just look at your long-term plans, I think, Jack, you're the head of the 2025 committee, if I actually have that year right. But on the CapEx outlook, do you see yourselves investing that $40 million to $60 million indefinitely? Just looking at aerospace cycle peaking at some point, nor is there that much automotive demand that you can -- that that's a good run rate going forward?

We don't think it will be that low. On the February call, what we said was we expected $50 million to $60 million this year but over the five-year period, we expected $50 million to $75 million. When we get to the next February call, we will probably say it's at the high end of that $50 million to $75 million range on an annual basis.

And when you look at it, part of that is expansion clearly, in automotive especially, and at some point, it's likely that we're going to pull the trigger on Phase VI. But part of that vision 2025, a big part of it, is directed at we see slowing growth in these markets compared to the very rapid growth we've had over the last 10 years where we've had double digit CAGRs on both automotive and our aerospace and high-strength applications. We don't see that kind of double-digit growth continuing over the next 10 years, but what we do see is increased competition. And so it's incumbent on us to become more and more efficient. We do that and we've done that with our capacity expansions.

But what a lot of people don't know is, while we've modernized a lot of Trentwood for example, there are still big portions of Trentwood that look like the Smithsonian that go back to 1950s in terms of some of the equipment that's in there.

So, as we look at our processing, there are still significant opportunities to upgrade our efficiencies, upgrade our quality, and we'll have spending related to that as we go forward as well.

So we expect pretty strong -- and Dan mentioned in his comments, he used the word strong organic investments, sizable organic investment in his comments. So short answer is we sit at the high range of that $50 million to $75 million, and we'll be more specific on that when we get to the February call.

Okay. And then just on your repurchasings and your high cost (technical difficulty) here, but as far as capital allocation, would you ever consider issuing some debt or maybe an accelerated buyback?

Well, I'm not going to say we wouldn't consider it, but I think we would prefer to purchase shares in the manner that we have, which we think is more value to existing and ongoing shareholders, and increase debt. When we look at refinancing and what we have here, we'll take a look at we think makes sense in terms of the size of whatever we would issue at that point in time.

Okay, fair enough. Thank you.

Okay. Thanks Josh.

Phil Gibbs, KeyBanc Capital Markets.

Jack, I just wanted to square up the Q4 volume. It sounds like aerospace volume is expected to be better just because Trentwood is essentially back on track. You're saying general engineering shipments down but not nearly as much because of the same issues?

Yes, not nearly as much as normal fourth-quarter seasonality because we've got a little bit of rebound from Trentwood.

And then auto, auto, it sounds like that's staying pretty much status quo at a solid level?

No. We think there'll be a little bit of seasonal impact. It will be the weakest quarter probably of the year in automotive. So there is some seasonal demand weakness there, although it continues to be pretty strong.

Okay, okay. That's what I needed. Appreciate it.

Okay. Thanks Phil.

And at this time, I'll turn the call back to management for any additional or closing remarks.

Okay. Thanks, everyone, for joining us on the call today, and we look forward to updating you on our fourth-quarter and full-year conference call with some 2016 outlook in February. Thank you.

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