Kaiser Aluminum Corp (KALU) 2015 Q4 法說會逐字稿

Good day, everyone, and welcome to the Kaiser Aluminum fourth-quarter 2015 earnings conference call. Today's call 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.

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's fourth-quarter and full-year 2015 earnings conference call. If you have not yet 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 we will use for this call.

Joining me on the call today are Chief Executive Officer and Chairman, Jack Hockema; President and Chief Operating Officer, Keith Harvey; 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 10-K for the full year ended December 31, 2015.

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 and 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. Welcome to everyone joining us on the call today. I will start today's discussion with comments on the fourth quarter and the full year of 2015 and Dan will provide further comments on the 2015 results. After Dan's comments I will share our expectations for 2016 and the three-year outlook for our served markets.

Our year-end customer activity is often unpredictable and it was again this year. While plate demand remains strong, fourth-quarter shipments and value added revenue were below our expectations as we experienced supply chain destocking for aerospace and high-strength long products. Order patterns for those products so far in the first quarter are as anticipated and we do not foresee further destocking.

Sales margins in the fourth quarter were strong, although our sales mix was not as rich as the unusually favorable third-quarter mix. As expected, our underlying manufacturing efficiency improved compared to the quarter as we experienced less growth-related inefficiency in our automotive operations and we recovered from the impact of Trentwood's third-quarter planned equipment outage.

Turning to slide 6 and a review of the full year 2015, we achieved record shipments, value added revenue and EBITDA. Shipments and value added revenue reflected our seventh consecutive year for record heat treat plate shipments and our fifth consecutive year for record automotive value added revenue. Our previous investments in Trentwood and across our automotive platform were key factors driving these record results.

EBITDA reflected the record volume plus expanded sales margins which benefited from lower contained metal costs and improved pricing for heat treat plate and certain general engineering products. EBITDA margin improved approximately 110 basis points compared to prior year, primarily due to the expanded sales margins and increased leverage from strong volume.

Although our underlying manufacturing efficiency improved during the year, the improvement was more than offset by costs and inefficiencies associated with digesting the 70% growth in automotive value added revenue over the past two years.

During 2015 we continued to invest in future automotive extrusion capacity with installation of a new press line at our London facility and upgrades of existing press lines at other automotive extrusion plants. We also commenced a $150 million multi-year investment project at our Trentwood facility focused on equipment upgrades to further improve our competitive position on all products produced at Trentwood.

A significant portion of the Trentwood investment will focus on modernizing our legacy equipment and process flow for thin gauge plate to achieve our differentiated KaiserSelect quality for these products. Along with the quality and cost benefits we expect the investments to generate a 5% to 10% expansion in Trentwood's capacity by early 2018.

In addition to deploying capital for organic growth in 2015 we retired over $200 million of debt, returned $77 million of cash to shareholders through share repurchases and dividends and increased our quarterly dividend 14% in early 2015 and added an additional 12.5% in early 2016.

Going forward we will continue to evaluate complementary inorganic growth opportunities that would create additional value for our shareholders and will continue to emphasize returning cash to shareholders via quarterly dividends and share repurchases.

Now I will turn the call over to Dan for a further discussion of 2015 results.

Thanks, Jack. In 2015 value added revenue grew 8% to a record $790 million reflecting strong value added revenue growth at all three of our strategic served markets, aerospace and high-strength, automotive extrusions and general engineering.

Aerospace and high-strength value added revenue increased $19 million or 4% over 2014. The year-over-year improvement reflected improved pricing on most aerospace products, including aerospace plate, as well as another annual record for aerospace heat treat plate shipments.

After growing 37% in 2014 value added revenue for automotive extrusions grew another 22% in 2015 to $111 million, setting a fifth consecutive annual record. This growth in 2015 was driven by a 19% increase in automotive shipments as we launched new programs at each of our automotive focused facilities and experienced a significant ramp up in the Ford F-150 programs.

While North American vehicle build rates have continued to increase in recent years, our growth in automotive has been fueled by the ongoing conversion of numerous automotive applications to lightweight high-strength aluminum extrusions. As an indication of our automotive content growth, our value added revenue per North American vehicle built increased 18% in 2015 to $6.32.

General engineering value added revenue grew 10% or $18 million in 2015 compared to the prior year. With shipments growing 4% the growth in general engineering value added revenue was primarily due to price improvements and benefits from lower contained metal costs for general engineering plate as well as some of our extruded or long products.

Turning to slide 8, adjusted EBITDA for the full year 2015 improved $21 million or 13% over the prior year to $183 million, establishing another new record for Kaiser. Improved sales contributed $34 million to adjusted EBITDA driven by shipments growth for both aerospace and high-strength and automotive extrusions, and improved sales margins as we benefited from favorable spot pricing and lower contained metal costs on certain of our higher value added products.

There was a negative $1 million net year-over-year effect on EBITDA relating to cost efficiencies that reflected two cost stories, one adverse and temporary and the other favorable and ongoing. The first temporary story is the approximately $5 million of cost inefficiencies incurred in 2015 as we ramped up production on numerous new automotive programs.

These front-end costs are typically eliminated as we move through the initial launch phase and settle into a normal more predictable production pace. The favorable and ongoing story is that, other than automotive, the underlying manufacturing efficiency of our operations improved in 2015. We anticipate a continuing long-term trend of efficiency improvement as we benefit from capital investments made in recent years to reduce overall conversion costs and increase throughput of operations.

Overhead and other costs increased $11 million in 2015 reflecting additional technical and managerial resources related to our growth in our strategic served markets and higher long-term incentive compensation and other incentive -- other benefit-related costs.

On slide 9 we show other key financial metrics. Commenting briefly on the fourth quarter, adjusted consolidated operating income improved slightly from the prior year quarter as the impact the favorable pricing and higher shipments was largely offset by higher costs.

Moving back to look at the full year, an item of note is the $493 million non-run rate pretax loss related to the termination of the defined benefit accounting treatment for the Union VEBA as we discussed in the first quarter of 2015. Slide 26 in the appendix reviews the impact of the change in accounting treatment for the Union VEBA on our financial statements.

Included in other non-run rate items, which for the full year largely offset each other, was a $3 million non-cash lower-cost [to] market inventory write-down recorded in the fourth quarter primarily due to the decline in market price for primary aluminum.

Reflecting the impact of all non-run rate items, we reported an operating loss of $346 million in 2015. Excluding non-rate items, adjusted consolidated operating income was a near record $151 million, up 15% compared to $131 million in the prior year. The $20 million improvement in adjusted operating income reflects the $21 million increase in EBITDA previously discussed, slightly offset by $1 million of higher depreciation expense.

The full-year 2015 net loss of $237 million, and loss per share of $13.76, reflects the non-cash loss on non-run rate items. Adjusted for these items, net income and earnings per diluted share were $72 million and $3.95 respectively. This compares to adjusted net income of $63 million or adjusted earnings per diluted share of $3.38 in 2014.

The increase in 2015 adjusted net income primarily reflects higher adjusted operating income and lower interest expense due to debt repayments in 2015, offset by higher income tax expense.

The effective tax rate for 2015 was slightly below our statutory rate of 37%. But adjusting for non-run rate items, our effective tax rate increased to 43% for the year and 57% for the fourth quarter.

Updated analysis in the fourth quarter indicated that a portion of our state net operating loss carry forwards will likely expire unused, which triggered approximately $5 million of additional tax expense that increased the tax rate for both the fourth quarter and the full year.

Most state, and all of our federal, net operating loss carry forwards, however, continue to be available to us causing our cash tax rate to remain in the low-single-digits. At the end of 2015 our federal net operating loss carry forwards totaled $564 million.

Illustrating on slide 10 the strong cash flow generation of our business, our 2015 adjusted EBITDA of $183 million funded our ongoing operations, sizable investment in our business through capital spending, interest payments and our variable annual contribution to the two VEBAs. In addition, we returned $77 million in cash to shareholders through dividends and share repurchases.

Cash contributions to the Union and Salaried VEBAs totaled $14 million last year and, based on our strong earnings and cash flow in 2015, later this quarter we will pay this year's variable contribution to the two VEBAs totaling nearly $20 million. As a reminder, our agreement to make variable contributions to the Union VEBA expires in September 2017 with the final payment to be made in early 2018.

2015 capital spending totaled $63 million as we installed a new press -- extrusion press at our London, Ontario operation and upgraded extrusion presses at each of our automotive facilities to support automotive growth. And additionally, in 2015, we began the initial spending on the multiyear $150 million modernization at our Trentwood facility.

We paid $28 million in dividends in 2015 as we increased our quarterly dividend per share 14% over the prior year to $0.40 per share. With continued confidence in the long-term outlook of our business and our commitment to drive shareholder value, last month our Board increased our quarterly dividend by another 12.5% to $0.45 per share.

We continued our disciplined share repurchase program in 2015, investing $49 million to acquire nearly 650,000 shares in our common stock. The program continues and, as of February 12, $119 million remained available under our existing Board authorization for further share repurchases.

During the year we retired over $200 million of debt and extended the maturity of our $300 million revolving credit facility through December of 2020. At year-end we continue to have strong liquidity and financial flexibility with cash balances exceeding $100 million and borrowing availability on our revolving credit facility exceeding $280 million.

And now Jack will discuss the outlook for 2016 and beyond. Jack?

Thanks, Dan. Slide 11 sets the stage for a discussion of our outlook with a reminder that approximately 70% of our sales mix is allocated to growing aerospace, high strength and automotive applications, all of which have a long-term growth trajectory, with the remaining 30% allocated to mature US industrial applications.

Slide 12 summarizes the outlook for the extensive portfolio of mill products that we produce for aerospace and high-strength applications including heat treat plate, sheet, extrusions, cold finished rod and bar, wire and drawn tube products. As shown in the pie chart on this slide, we supply high-strength products for commercial aerospace plus other aerospace and industrial applications.

55% of demand is for large commercial aircraft construction where we expect demand growth driven primarily by build rates, but also by larger aircraft and growing use of monolithic design that benefits plate demand with some detriment to demand on our other aerospace long products.

Airframe builds in 2015 were a record and for the sixth consecutive year order rates exceeded builds. The large nine-year order backlog at Boeing and Airbus continues to support growing build rates.

There are a number of storylines over the next few years for commercial airframes, but the net result is growth. Builds are expected to decline for the very large Boeing 747 and Airbus A380 airframes, and the Boeing 777 and Airbus A330 are expected to have a small dip in builds during the redesign transition. At the same time increasing builds of other twin aisles, particularly the A350, the 767 and the 787, plus growing builds of single aisles by both Boeing and Airbus are expected to drive net demand growth over the next few years.

Shifting to other aerospace sectors, approximately 30% of demand for our high-strength products is driven by applications including regional jets, military aircraft and business jets. The remaining 15% of demand for these products is for various industrial applications which currently have limited growth as a consequence of weak US industrial growth and some demand destruction from substitution to lower strength products.

In summary for this group of applications, we expect annual demand growth of 5% per year over the next three years and in 2016 we expect our year-over-year value added revenue growth to increase approximately 5%. We believe that supply-chain inventories are in equilibrium for most of these products and do not anticipate further de-stocking in 2016.

Turning to slide 13 and our outlook for automotive extrusions. Our demand is driven by mature applications such as anti-braking systems and drivetrain components and growing applications that include chassis and structural components and crash management systems where aluminum is being utilized to lightweight vehicles for improved fuel efficiency.

While we remain optimistic about the prospects for growing aluminum extrusion content in vehicles, we are increasingly cautious about the outlook for North American build rates. As such we anticipate approximately 6% average annual demand growth for our served automotive markets over the next three years driven by approximately 1% average annual growth in build rates and approximately 5% average annual content growth.

As a well-positioned, leading automotive supplier, we have grown our automotive extrusion value-added revenue approximately 70% over the past two years and we expect an additional year-over-year growth of approximately 10% in 2016. While we have numerous new product launches scheduled again this year, the sales growth benefit from these new products will be partially offset by retirement of existing products that have reached the natural end of their product lifecycle.

Turning to slide 14 and our common alloy industrial products, US industrial production was flat over the last five months of 2015 and we do not currently foresee growing demand for our general engineering products in 2016. We expect to continue the long-term trend of declining sales for our nonstrategic applications as we focus our resources and production capacity on our strategic aerospace, automotive and general engineering applications.

Turning to slide 15 and a summary of our outlook. While there is more general uncertainty about the economy than in recent years, our outlook considers current market conditions. In 2016 we anticipate approximately 3% to 5% year-over-year growth in our total value added revenue with improvement in EBITDA and EBITDA margin growing by sales -- driven by sales growth and continued improvement in manufacturing efficiencies. And as we have noted on previous earnings calls, we continue to anticipate increased import activity and competitive price pressure on general engineering plate in 2016.

In addition to capitalizing on the secular growth opportunities in our served markets, we continue to benefit from investments we have made over the years to improve efficiency and overall throughput. We anticipate that the Trentwood modernization project, along with other planned investments, will provide the next steps in advancing our overall manufacturing efficiencies and product quality while creating additional capacity for heat treat plate and automotive extrusions.

With these growth-related investments and our sustaining capital investments we anticipate capital spending of approximately $60 million to $80 million per year over the next three years with spending in 2016 at the upper end of the range.

Turning to slide 16 and a summary of our comments today, we achieved record results in 2015 and we expect even better results in 2016 to be driven by aerospace and automotive sales growth and improving manufacturing cost efficiencies. We are well-positioned for further profitable growth and shareholder value creation beyond 2016.

Top-line growth will be facilitated by strong secular demand growth for automotive and aerospace applications. And with additional investments in quality, efficiency and production capacity we will continue to capitalize on these growth opportunities. We will now open the call for questions.

(Operator Instructions). Steve Levenson, Stifel.

In the past you have helped us a little bit with a discussion about seasonality. Do you see that same situation coming up in 2016?

Yes, we do, Steve. Typically the first quarter is our second strongest quarter and the second quarter is our strongest quarter. And then we typically have the seasonal weakening in the third quarter and then more significant seasonality in the fourth quarter and unpredictability in the fourth quarter.

It's unfortunate. I guess it is not something that is easy to manage, though?

I mean that is part of our business model. We recognize that volatility and recognize we have to know how to flex our cost and adapt to the conditions.

Got it, thanks. And just to follow up on production and delivery of airplanes. There has been some controversy because Boeing's deliveries in 2016 are going to be less than 2015. But it appears that production is rising, the difference being new models that go into inventory and some tankers that need completion.

Could you tell us a little bit about what you are seeing in your releases related to aerospace? And if those changes -- those differences between builds and deliveries have any impact on Kaiser's business?

Certainly. It is just as you iterated here, two factors. One is there is a lead time on our shipments versus actual production of airframes. So we would have seen some of the flattening, if you will, already last year. But the same is true, as we said, we are anticipating 5% year-over-year growth in our aerospace sector and that is primarily driven by the large commercial aircraft. So it is exactly as you articulated.

Great, thank you very much.

Jorge Beristain, Deutsche Bank.

Jack, maybe this question is for you. I think that the results were considered a little bit of a miss, particularly you flagged some of the impact of the auto launches in your release and your comments.

Could you just walk us through at what point you think that that kind of lag on cost eventually dissipates and when you start to hit your stride in terms of completing these new platforms? Or is this going to be sort of more of the same throughout 2016?

Yes. Let me answer more broadly just to put a clear point on the fourth quarter. We had it in my remarks here earlier, but the biggest factor -- and I will talk in terms of what we said on the third-quarter call versus how things played out. What you might have anticipated based on our third-quarter comments -- third-quarter call comments.

The biggest impact was the aerospace long products where we had significant destocking and it really became increasingly apparent as the quarter proceeded. There was some in October but then as we got into November and then into December the bottom really fell out. So that was by far the most significant.

And you may recall, we said on the third-quarter call we expected aerospace to come in at the bottom of our range in terms of value added revenue for the year, which as I recall was around 6%. We actually came in at a little over 4%. And all of that was a function of long products. Actually heat treat plate in aerospace in the fourth quarter was even a little bit better than what we had expected.

So it was really a softening in long products and we attribute that to destocking. We are in the first quarter here and we see normal order patterns there, no impact at all from destocking in terms of our actual January shipments and what we are seeing for February and March. So that appears to be a clear anomaly.

The other thing that we did not signal on the third-quarter call is that the third quarter had very, very strong sales margins that were up pretty substantially compared to the first half of the year. Fourth quarter was off 1% from those sales margins but was about 1.5% better than our run rate in the first half.

So we had strong sales margins in the fourth quarter but a 1% degradation in sales margins is another $2 million on $200 million worth of value added revenue. So it was really primarily the decline in long products and then the slight degradation from the unusually strong third quarter on sales margin.

In terms of automotive, actually automotive inefficiencies, or stated more positively, automotive efficiency was improved in the fourth quarter. We had said on the third-quarter call we expected that and we also expected the impact of the planned outage of Trentwood would be behind us. Both of those things happened, came in at kind of the low range of what we signaled on the third-quarter call, but came in pretty much within the range that we expected.

Going forward we expect this year we will see improvement in automotive efficiencies, but we have a number of launches again this year. It is only a 10% -- only I say, a 10% year-over-year increase. But the new products are a lot more than 10% because we have retirement of old programs.

So we have a lot of new programs coming on that will continue to be a challenge and we are not at full speed yet on the dramatic increase in volume. It is not only the new programs but it is just that total volume we have going through those plants, a 70% increase over two years. And we have got some programs that are running orders of magnitude higher than the maximum that we expected and were capacitized to produce.

So we have a lot of challenges remaining in our automotive plants, we are working through those and it is going to be tough. But we expect we'll be better in 2016, but we don't think that we're going to be at the end of the road in terms of being back to, quote/end quote, normal in 2016.

Okay, well I guess, like they say, that is a high-class problem to have. And the second question I had was just on your Trentwood CapEx spending that you have green lit. Could you just give us some feelings around there in terms of what kind of payback you are expecting on that project or concretely maybe return on capital that you are kind of targeting so we could sort of model that incremental EBIT going forward?

I wouldn't give you a specific number, but will we will say is the project has very attractive returns as we go forward, a very comfortable margin well over our cost of capital.

Single-digits, double-digits?

Yes, double-digits, yes.

Okay, thank you.

Tony Rizzuto, Cowen and Company.

I have got a couple questions. Throughout your comments there was a lot of sprinkling of cautionary comments that you answered about the long product side and the end of the destocking and you are seeing more normal patterns so far coming out of the gate. And you made some comments about auto, you are increasingly cautious on -- about the North American auto build-rate. So for one, I was wondering if you could comment about that?

And then we are hearing from some of our channel checks that maybe the aero heat treat side on the 2 and 7000 series not as tight as it was maybe three, five months ago. And I am wondering how you see that playing out along with maybe increased import pressures for the steady flow of imports in the 60, 61 market, how that all plays out from a standpoint of volumes and pricing as you look at 2016.

Okay, you got a lot in that basket, Tony.

I always try.

(Laughter) let me start with North American builds. We said that our outlook for the next three years that we used in this forecast is a 1% CAGR on North American builds. If you look at the industry forecasts and the industry forecasters, they are typically around a 2% CAGR.

And we think that that may be a little too ambitious in terms of our outlook here. So we have cut it to 1%. But still good, strong build rates but a little bit -- we are a little bit more cautionary than what some of the industry forecasts are.

On -- you talked about aerospace plate; I will talk about plate in total. Our lead-times on heat treat plate out of Trentwood right now are 29 weeks and that is a pretty substantial lead-time. I think we may have been in the low 30s three months ago. So it may have slipped a little bit, but we are still basically six-month lead-times. We are booked past the middle of the year at this point. So plate demand continues to be very strong.

In terms of pricing on general engineering, we had indicated we expected to see impact starting in early 2016. We are seeing some impact early in 2016. Our outlook internally, and now externally with these comments, is that we expect it to become more and more prevalent as the year goes on, more prevalent in the second half than the first half.

If your follow-up question is ask me to quantify that, I would say it would be between maybe $1 million to $2 million possibly in the first half compared to our run rate in the second half of last year.

And, Jack, do you see that impacting at all -- one of the problems obviously you and I have discussed many times in the past, how that supply or the surplus in that market can tend to cause the other heat treat suppliers of very high quality material to be going for a smaller pie, if you will. Obviously the build rates are very strong, but do you see that impacting in the higher value added part of the market on the 2 and 7000 series or not really?

We have not seen it this time around. We have in the past few years -- you go back four or five years we saw some impact there. At this point there is very little domestic activity in general engineering plate other than Kaiser, maybe in some of the very thick plate, but the big demand is in thin plate. And those products, the primary competition is import competition, that is where we are seeing the biggest price pressure.

Okay. And then one more question if I may. Just the Trentwood and how you see the cadence of that in terms of how should we think about any potential dislocation from this -- not the building out but the refurbishing, if you will, some of that legacy equipment, how should I think about the impact on the operations from a standpoint of efficiencies going forward?

Yes, good question. In the news release when we announced the investment we had a comment in there that part of the reason we were stretching it over five years is to try to manage the impact of disruption. Clearly we will have some disruption -- whenever you do something like this and you get out of the normal cadence of operations it has an impact. We don't think it is going to be anything huge. And when we get into some of the activities that might give us some disruption we will try to signal that ahead of time.

Okay, Jack. Thanks very much, good luck with that too.

Thank you.

Phil Gibbs, KeyBanc Capital Markets.

The 3% to 5% outlook for this year on the top line, how much of that is pricing versus volume?

It is probably neutral in terms of pricing. As we just already discussed here in the Q&A, we are expecting some degradation in heat treat plate progressively as we go through the year. On the flipside, we indicated on the third-quarter call that we were benefiting from some fairly significant price increases on certain long products in general engineering and that really kicked in in the second half of the year.

So, when you look at the full year, we will get a full-year benefit of some of those price increases rather than six months. And you net all that out it's probably pretty close to a wash, I would say.

Okay, that is helpful. And I think you called out about $5 million in inefficiencies in 2015, but you also had some benefit from lower contained metal costs. So, I'm just trying to square up those two things for 2016.

Well, the inefficiencies, and you may be referring to some overhead too, is that from Dan's comments?

You said $5 million, I think that was the automotive you were speaking to. Is that right, Phil? $5 million of inefficiency?

Yes, if that is what you called out. I am just trying to parse out what might have been a headwind this past year that is likely not to repeat.

Yes, so the automotive, the $5 million is inefficiency, but inefficiency was not $5 million. There was also quite a bit of plant overhead related to the significant increases in volume. Our resources are catching up to the step change we have had in volume in our automotive facilities.

So that $5 million, we don't expect to see that repeat. As I said, we think we're going to be more efficient in automotive not to what we think our steady-state long-term should be, but more efficient in automotive this year than we were last year.

Related to the lower contained metal, that really influenced our sales margins. So when we look back on 2016, we did have some true raw price increases, but some of the sales margin that we gained was the fact that we do not pass through directly changes in metal on some of our very high value added products.

And so, as metal migrated -- metal cost migrated down over the year that gave us some hidden benefit, if you will, in our sales margins. And we think those are relatively stable right now unless we get a big surge in metal cost. And typically there is a little bit of a lag there recovering all of that for the same reason we benefited when it drops down dramatically.

Okay. Could that have been as much as $5 million for 2015, the benefit from lower contained metal in the margins?

That is hard -- it is hard to segregate the two. We have got so many products and there is so much mix in there and it is hard to tell. It is impossible to tell, I will just say. The sales margins were significantly better year-over-year, it would have exceeded $5 billion in total sales mark price and contained metal benefits.

Okay. And then just lastly, I think you had mentioned in the release -- and you mentioned on the call here too that the fourth quarter did not shape up as strong as you had anticipated. Was it just in the long products piece or was there other things in there as well?

No, it was -- we have gone through this thing with a fine tooth comb, a very, very fine tooth comb. It is all right there in products other than heat treat plate in aerospace -- aerospace and high-strength products. It is all right there. And it is virtually every -- we have got a seven or eight other products that we ship in that category and it was virtually every one of them was substantially below where we expected them to be in the fourth quarter.

It was quite an anomaly and in general engineering we were right where we expected to be pretty much. And automotive was right where we expected. So everything was pretty much where we expected it to be in the fourth quarter except for that grouping of long products in aerospace, it was quite an anomaly.

Okay. And then, Dan, what share count are we at right now approximately? Because I know that the balance -- excuse me the quarterly income statement was not provided.

Yes, I believe it is just a little over 18 million shares as of yearend, is that right?

February 12 there was 17.5 million outstanding -- registered outstanding. I got you.

I think we need to confirm that one.

Yes.

We will come back when we get the final number.

Thanks, guys.

I mean it will be obviously on our 10-K -- on the face of the 10-K. But I think that is not an updated number that you are looking at. Talking internally here.

Thank you.

Edward Marshall, Sidoti & Company.

So you have had some steady pressure for some time in the plate side of the business I guess especially from the import activity. It is really not apparent in value added revenue or value added revenue per pound and that is a testament I guess to you. But, I guess my comment is -- or my question is, is this more of the same for 2016 or is there an expected step up of activity and therefore a little bit more pressure than you have seen in the recent years?

Actually, Ed, we had improvement in general engineering plate prices net in 2015 and especially in the second half of 2015. So that is why in my earlier comments to a question about 2016 I compared where I think we will be in the first half compared to the second half of last year. And a big part of that was the lower contained metal prices that did not get passed through that benefited our general engineering plate. And some was that we were able to get through some stronger pricing as well.

So, that is the situation last year. As we go forward we expect to see, as I said, maybe $1 million or $2 million of total impact degradation first half of this year versus second half of last year. And then it could be more than that as we get into second-half, although we are not ready to forecast anything at this point.

Got it. You had an unusual planned maintenance activity disruption I guess in 2015. Do we expect any change in 2016, is it a normal year where it is more 60/40?

You mean -- are you talking the seasonality of the major maintenance?

That is correct.

Yes --.

Is it a normal season this year?

Yes. Well, last year was heavily weighted to the second half of the year. Yes, this year, I am waiting for somebody to raise their eyebrows or give me a thumbs up. But I think that 40 in the first half, 60 in the second half is just probably order of magnitude in the ballpark.

Okay. And the --.

I am getting head nods on that.

That is good, that is good. The $5 million of NOLs that were adjusted in the tax rate, I just want to kind of confirm, that was not broken out in the NRR -- in non-run rate items, right? That was included in the $0.60 number?

That was included in the $0.60 number. And you could argue it is an item that is out of the activity of this year, but it is something that we counted as part of the actual tax, not non-run rate.

Got it. And so -- okay that brings you back down to the normal run rate. Okay and that is about $0.27 I guess of --?

That is about right. For the fourth quarter, would have been about that much.

Okay, thanks, guys.

And one other comment in answer to Phil, February 12 will be on the K that we have 18 million effectively shares outstanding, it rounds to 18 million.

Josh Sullivan, Sterne Agee CRT.

Just on the aerospace destocking in the fourth quarter, can you tell if that was due to the supply adjustments for the very large aircraft or adjustments for the next generation aircraft ramping up here? Anyway for you to tell?

Yes, it is hard to tell. And the first comment I would make is that where we said that 15% of demand for the aerospace and high-strength sector is related to industrial applications. It is a much higher number in the long products than it is in our aerospace plate.

So there is a big industrial component, there is also a big business jet component, smaller regional jets, those kinds of applications. Much less large commercial airframe demand on the long products than there is on the sector in total.

And where that destocking came from, it's anyone's guess. We have a couple of stories where we know what was happening, but that only explains maybe 10% of what was going on there. It happened in a myriad of products, a myriad of customers, it is hard to explain.

Okay. And then on the automotive side, you guys continue to get some pretty strong pricing. As the content increases how does that pricing picture look over the next three years? The products you are getting increased content on higher value. Should we expect that pricing to go up?

No, if you are talking the automotive sector where we show value added revenue per pound, that will decline over time. And the reason it would decline over time, the highest value added per pound is for our drive shaft tubing that is maybe $6 or $7 a pound value added revenue where the typical automotive product other than driveshaft is in the $1.50, $2 range per pound. And so, the growth is going to be in the lower value added per pound items versus the mature driveshaft.

Okay, well, thank you.

(Operator Instructions). Steve Levenson, Stifel.

I hope I understood this right, so I am just asking for a clarification. On automotive you mentioned that demand was up over the maximum. And I want to make sure I understood that that is how your contractual arrangement works? And what happens to pricing when you go over the top like that?

As of the fourth quarter nothing happened. But that is under review right now by our President and COO of who is sitting here giving me a big thumbs up.

Okay, so I get to ask a different question after the first-quarter call.

(Laughter).

Or I will get to ask this one again. Okay, thanks very much.

Jorge Beristain, Deutsche Bank.

I guess my questions are more for Dan; just a little bit on the financial stuff. Could you just clarify a little bit? Some of the non-run rate items of $4 million in the fourth quarter appears to be related to the mark to market of a convertible bond and some financial derivatives. Could you just clarify, is that something that we should expect quarter to quarter going forward? And how we could best model that?

Well, I think it is very difficult to model non-run rate items. And that is part of the reason we consider them non-run rate, because most of the mark to market items will be driven by what happens with the market of commodities. By the way, our convertible -- anything related to the convertible debt with regard to the mark to market of that derivative was done in the prior year, we didn't have anything this year and wouldn't have of course in the future. And I think (multiple speakers).

Sorry, I was reading the footnotes, I guess that needs to just be updated, but --.

The mark to market gains or losses are related to our metal or gas positions, not related to the convertible debt. And again, I can't predict those.

Okay. And then the other question I had just in terms of the change, I think there was about a $6 million increase in costs this year which you broke out in your cash flow waterfall. Some of it was related to benefits -- I assume those mean wage increases. Some of it was related to stock. Could you just kind of quantify how much is in each bucket there and how we would expect -- maybe in a rising stock market does executive comp get tied to that or can we expect the same level for 2016?

I don't know that we are going to have a significant change in the long-term incentive compensation as we go forward. And the short-term in compensation, to the extent that is going to be part of incentive comp, depends on how our EBITDA turns out to be during the course of the year and the return on our program for short-term. It was off this year because we are, of course, at a higher level than we were in the prior year.

And relates to our performance modifiers beyond our EBITDA performance.

Very good point. Because we have additionally some pretty high leverage on some of those modifiers. Part of the benefits increases that we saw during the course of this last year were medical related for employees. And so again, it is difficult for us to predict how the inflation will play out on that. But we are hopeful that we are going to be able to control that to some degree. But there were a couple million dollars worth of medical benefits right there.

Got it. Thanks very much.

Paul Luther, Bank of America Merrill Lynch.

I just want to talk quickly on the general engineering plate business. You had a fairly sober outlook in that business which is understandable. I was wondering if you could talk about plans for that side of your operations. I get that its contribution is going to naturally wane right as aerospace and automotive growth outpace it looking relatively flat.

So, are there other things you are considering, other things in the toolbox to -- in that business given the import pressure, whether cutting costs or more aggressively shifting output away from that business into the others, things like that?

A big part of the $150 million investment is related to general engineering plate. And we are looking as we go through the process some pretty substantial reductions in our conversion cost. When -- as I said in my earlier remarks, on thin gauge plate or light gauge plate, which is less than 2 inch plate which we now process on some very old equipment that is not state of the art. Our intention here in the $150 million is to get equipment comparable to what we are using for our thicker plate, both general engineering and aerospace plate that will give us big cost benefits.

Got it, thanks. And then a housekeeping one. In terms of cash taxes, I think you said you were low-single-digits for 2015. Do you expect that to continue through 2016 given the NOL base?

Yes, we expect that for the -- I will call it for several years probably given the NOL position that we had, predominantly federal NOLs are what are going to be shielding the taxation for a period of time. And again, I think I said $564 million of pretax US income shielded by the federal NOLs.

Perfect. Thanks very much, guys.

And with no further questions in the queue I would like to turn the conference back to Jack Hockema for any additional or closing remarks.

Okay, thanks, everyone, for joining us on the call and we look forward to updating you on our first-quarter call in April. Thank you.

Again, that concludes today's presentation. As a remainder, an audio recording of this call will be available on the Company's (audio ends abruptly).