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Executives

Melinda Ellsworth - Vice President, Treasurer

Jack Hockema - Chairman, President and CEO

Dan Rinkenberger - Executive Vice President and CFO

Neal West - Vice President and CAO

Analysts

Tony Rizzuto - Cowen Securities

Timna Tanners - Bank of America Merrill Lynch

Josh Sullivan - Sterne Agee

Edward Marshall - Sidoti & Company

Phil Gibbs - KeyBanc Capital Markets

David Katz - J.P. Morgan

Steve Levenson - Stifel Nicolaus

Lloyd O'Carroll - Davenport & Company

Kaiser Aluminum Corporation (KALU) Q1 2013 Results Earnings Call April 24, 2013 1:00 PM ET

Operator

Please standby, we are about to begin. Good day. And welcome to the Kaiser Aluminum First Quarter 2013 Earnings Conference Call. Today’s conference is being recorded.

At this time, I would like to turn the conference over to Melinda Ellsworth. Please go ahead.

Melinda Ellsworth

Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum’s first quarter 2013 earnings conference call. If you have not seen a copy of today’s earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call.

Joining me on the call today are Chairman, President and Chief Executive Officer, Jack Hockema; Executive Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neal West.

Before we begin, I’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, 2012. The company undertakes no duty to update any forward-looking statements to conform to actual results or changes in the company’s expectations.

In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. At the conclusion of the company’s presentation, we will open the call for questions.

And I would now like to turn the call over to Jack Hockema. Jack?

Jack Hockema

Thanks, Melinda. Welcome to everyone joining us on the call today. We had solid underlying results in the first quarter that reflected mild headwinds that we discussed during our fourth quarter earnings call in February. We expect these headwinds to continue in the second quarter before moderating in the second half of the year.

Specifically for aerospace products other than plate inventory overhang continues to dampen demand, last year 20% year-over-year increase in our aerospace and high strength value-added revenue reflected growing demand and a focus on supplier readiness that contributed to the current inventory overhang.

We are also seeing evidence of some situations specific aerospace plate inventory overhang. Although the excess supply chain inventory is most prevalent in aerospace products other than plate.

For automotive, build to relatively flat at a pace similar to last year after the step change 18% year-over-year build rate increase in 2012. In addition, our content growth is being offset to some extent in the short-term by a negative trend for anti-lock brake system to smaller components and reduced exports.

And for general engineering and other industrial applications demand is down from prior year as the economic recovery continues at an anemic pace, exacerbating the situation we’re not experiencing the benefit from significant supply chain destocking that boosted demand during the first six months of each of the prior three years.

Illustrating the impact of the supply chain inventory MSCI statistics for aluminum rod and bar indicate that while the first quarter service center shipments to their customers were down 5% year-over-year, service center purchases from their suppliers i.e. the mills were down 11% year-over-year.

Nevertheless, our long-term proposition remained intact as we expect strong secular demand growth for aerospace applications and automotive extrusion applications. With excellent prospects for long-term growth and opportunities to continue to enhance our manufacturing platform we have embarked on several organic investments to expand a capacity and to enhance our manufacturing efficiency and flexibility.

In addition to our previously announced $35 million project for new casting complex at our Trentwood facility we are proceeding with the new $45 million package of heat treat plate investments at Trentwood that combines various projects from the previously envisioned Phases 5 and 6.

This heat treat plate investments are expected to be online in early 2014 and are designed to increase our heat treat plate capacity by approximately 10% in order to meet anticipated demand in 2014 and future years, and to enhance our manufacturing flexibility and efficiencies for processing an increasingly demanding heat treat plate product mix.

We’ve also commenced investments in our automotive platform to support new automotive extrusion programs that have been captured and are scheduled to launch over the next three years. The approximately $15 million of investment projects will further augment our manufacturing capability and capacity at our Bellwood, Virginia, Sherman, Texas, London, Ontario and Kalamazoo, Michigan facilities.

Our London facility will continue to be the primary location for launching our new automotive programs and has the capability to provide dual sourcing for most automotive products to produce -- be produced in Sherman and Kalamazoo.

Kalamazoo’s automotive focus will be on ABS blocks and other products compatible with the facility's primary mission to supply general engineering rod and bar applications. And Bellwood will continue to focus on drive shaft and other tubing applications, while the Sherman facility will provide additional capacity and capability for bumpers and automotive structural applications.

Our planned investments in automotive extrusions are a direct result of new programs booked and the need to ensure that we have the breadth and depth of capacity and capabilities across our manufacturing platform to meet customer needs.

With these investments we expect that our 2013 capital spending will be approximately $80 million, which is at the high-end of the rage that we previously indicated, a portion of the spending for these aerospace and automotive investments will continue into 2014.

Overall, our strong financial position and positive long-term outlook position us to continue to invest in value creating organic growth initiatives and to pursue potential acquisitions, while also enhancing shareholder value through quarterly dividends and modest share repurchases.

Beginning in the first quarter, we repurchased shares under our authorization approved by the Board in 2008 through the end of last week we acquire $29 million of common stock and with approximately $18 million remaining under the authorization, our Board has authorized an additional $75 million for future share repurchases.

The increased authorization underscores our confidence in the future while continuing to preserve liquidity and financial flexibility to capitalize on other opportunities to create value.

I’ll now turn the call over to Dan to provide further insight into the first quarter results and then I'll provide some additional color and context regarding our short-term outlook. Dan?

Dan Rinkenberger

Thanks Jack. Largely in line with our expectations total value-added revenue in the first quarter was $187 million, which was down slightly from the quarterly rate of last year’s first half.

The quarter reflected the headwinds we discussed in our prior earnings call. Most notably, a modest inventory overhang in the aerospace supply chain flat North American automotive build rates compared to last year’s first half and weak supply chain demand for industrial applications in the first quarter, which contrasted with the destocking that we saw in early 2012.

First quarter automotive extrusion value-added revenue reflected growth in new bumper systems and other automotive applications. However as Jack mentioned earlier, we are seeing a trend towards smaller anti-lock braking system parts, as well as reduce anti-lock braking system export that in the short-term has offset the content gains that we are capturing in other automotive extrusion applications.

Adjusted consolidated EBITDA grew to $48 million in the first quarter, both value-added revenue and adjusted EBITDA were boosted $4.5 million as we recognize revenue related to the contractual payment due from an aerospace customer in lieu of that customer taking minimum volumes under our multiyear agreement.

Adjusted EBITDA margin improved to 25.6% in the quarter, excluding the impact of the $4.5 million customer payment adjusted EBITDA margin was 23.8%, which was comparable to the first half of last year.

On slide eight, we showed key consolidated financial metrics. Consolidated operating income as reported of $50 million in the first quarter, included approximately $9 million of non-run rate gains which are detailed in this presentation in the appendix on slide 22 and 23.

Adjusted for these non-run rate gains first quarter consolidated operating income was $41 million roughly in line with the pace of the first of 2012 even after taking into the $4.5 million customer fee mentioned earlier.

Reported net income for the first quarter was $34 million or earning per -- per diluted share of $1.73, adjusting for non-run rate items, as well as an $8 million Canadian tax benefit first quarter net income was $20 million or adjusted earnings per diluted share of $1.03.

Our effected tax rate for the quarter was approximately 20%. This lower tax rate reflects the favorable audit settlement that reduced our Canadian income taxes related to prior years, with our sizable net operating loss carry forwards and other tax attributes our cash tax rate remains in the low single-digit percentages.

During the quarter we funded $20 million annual variable contribution to the VEBAs and paid over $20 million of cash to shareholders through dividends and share repurchases. With quarter end cash and short-term investments totalling $334 million and revolving credit availability of $279 million, we remain well positioned to fund our attractive growth initiative, as well as modest share repurchases.

And now, I’ll turn the call back over to Jack to discuss industry trends and our business outlook. Jack?

Jack Hockema

Thanks, Dan. Turning to slide nine and our outlook for aerospace and high-strength applications, although airframe manufacturers, backlog and order rates remains strong as indicated in my opening remarks we’re experiencing mild headwinds for our products as the supply chain rebalances to work our pockets of excess inventory that develop during the supplier readiness induced demand surge in 2012.

While the headwinds are unwelcome, we’ll take advantage of the situation the second quarter by scheduling equipment downtime at Trentwood to accommodate construction related to our capital projects and at our Newark, Ohio facility to complete planned major maintenance projects.

Turning to slide 10 an automotive, we expect second quarter value-added revenues similar to or slightly better than first quarter as build rates continue the pace similar to the first half of 2012. While our content growth is being offset to some extent but reduced ABS exports and smaller blocks and vehicles. We expect growing total content in the second half and in future years as we launch book new program.

Turn to slide 11, and general engineering applications, while the index of industrial production for U.S. manufacturing shows a modest uptick in the first quarter, wheel demand is weak compared to last year when order rates were bolstered by supply chain destocking. While visibility is limited our current view is that the second quarter for these applications will be similar to first quarter.

Slide 12 summarizes our short-term outlook. We expect continued demand headwinds and higher planned major project expense for construction and maintenance activities in the second quarter. Despite these headwinds and consistent with our previous outlook for the first half of 2013, we continue to anticipate that the combined first quarter and second quarter results will reflect total value-added revenue and adjusted EBITDA margins for the first half similar to the first half of 2012.

While we expect that the first half 2013 results will be relatively flat with the prior year, we’re cautiously optimistic about our prospects for the second half. Our current view is that we will have favorable year-over-year comparisons in the second half as the aerospace supply chain inventory situation become less of a drag on demand.

Summarizing our remarks today, while we are experiencing short-term headwinds, we continue to be term outlook for continued strength of secular demand growth in our aerospace and automotive applications. Our continued focus on organic investments in capacity capability, quality and enhanced operating efficiencies will further position us to capture additional growth in aerospace and automotive applications in years ahead.

Longer term, we’ll maintain financial strength and flexibility to invest organically, pursue potential acquisitions and enhance returns to shareholders through continued dividends and moderate share repurchases as appropriate. We’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instruction) And we’ll go first to Tony Rizzuto with Cowen Securities.

Tony Rizzuto - Cowen Securities

Thank you very much. Hi Jack, Dan and Melinda. Got a couple of questions, first one, first of all, I just want to congratulate you guys on all the progress. And you are finding the right balance, I think, between growth and returning cash and other forms of shareholder enhancements. So kudos to you on that.

The first question I have is just to follow up a little bit on the guidance you provide. And I want to make sure I'm thinking about this correctly. So when we look at the first half last year, value-added revenue is $380 million and your adjusted EBITDA margin was 23.7%.

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

Jack Hockema

I’ll answer it two ways, Tony. What we said in our remarks is that when we add the first quarter and the second quarter together including the $4.5 million payment in the first quarter, that total first quarter will be -- first half will be similar to the first half last year. So another way to look at it is take the first quarter with the $4.5 million and then add it up and make the total first half similar to the first half last year.

And if you said another way, if you back the $4.5 million out of the first quarter and then look at the second quarter, it should be similar without that $4.5 million except there will some additional expense related to the major maintenance and the capital projects.

Tony Rizzuto - Cowen Securities

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

Jack Hockema

Well, it’s just that the supply chain didn’t destock as they have in the prior three years. So that’s part of the reason that we were looking forward to the second half because the prior three years we saw heavy destocking in the second half to make up for the irrational exuberance in the first half. So we’ve not seen that irrational exuberance here this year throughout the general engineering and the industrial supply chain.

So hopefully that gives us some benefit in the second half year-over-year comparisons assuming that the economy didn’t go in the tank here.

Tony Rizzuto - Cowen Securities

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

Jack Hockema

You mean, our pickup for…

Tony Rizzuto - Cowen Securities

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

Jack Hockema

Yeah. We would hope so because again if the key macro indicator that we look at is that index of industrial production for manufacturing that we show in the chart in our slide deck and it’s up a tick. I mean, it’s still very, very modest growth but the fact is it is modest growth year-over-year.

But where we can get our hands on it. And anecdotally, we’re seeing that there is -- there is not destocking of significance in supply chain. But we’re comparing to heavy destocking in prior periods. So the -- but the full year last year, we ended up with pretty much balanced inventories, it was just restocking first half, destocking second half. So we would expect if the economies continues to grow at 1% or 2% pace which the indicators tell us that it is.

By the time, the year is over, we should see slightly higher total demand, which means stronger second half comparisons year-over-year.

Tony Rizzuto - Cowen Securities

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

Jack Hockema

I think we have one small plant. Yeah, our Sherman plant expires second half of the year. And that’s the only one this year. The bigger plants, the Master steelworker contract that covers Trentwood and Newark, Ohio is a September 2015, I believe, so it’s still a couple of years away.

Tony Rizzuto - Cowen Securities

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

Jack Hockema

Okay. Thanks, Tony.

Operator

We’ll go next to Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners - Bank of America Merrill Lynch

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

Jack Hockema

No. I think it’s still on the table. We obviously got some significant organic growth ahead of us and we’re happy to do that. We did raise the cash last year. We were hopeful of the acquisitions that we’re looking that we’re going to be coming forward and something we could execute on during the course of the last year.

Those didn’t really develop at the pace that we note but they are still out there. And so we still are hopeful that we can have some acquisition growth. But we also think that we have stronger balance sheet that we can organically grow the available or have cash available for acquisitions and also returning cash to shareholders the same month.

Timna Tanners - Bank of America Merrill Lynch

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

Jack Hockema

No. There is not anything that’s unusual really about this other than the fact that it was a larger payment in the contracts of this given quarter. So the EBITDA impact relative to the quarter was larger but we have contract terms that were similar to this in many different customer contracts.

They are designed to give flexibility to the customer but also ensure that we have some level of return under the contracts in adverse times or under any circumstance. We’ve had capacity fees, take or pay arrangements et cetera. And customers in the past have chosen to take rather than pay.

Timna Tanners - Bank of America Merrill Lynch

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

Jack Hockema

No. You should not have expected. It has any impact on go-forward demand. This and the other type of contracts that Dan was talking about long-term contracts that spend a number of years.

Timna Tanners - Bank of America Merrill Lynch

Okay. Great. And then the final question I was in terms of Trentwood, I kind of lose track on the phases. You said this last one was a phase 5 and 6. Just want to make sure I understood. So that's an anticipation, 10% increase in capacity into 2014, is that right, from prior levels?

And in the past, you talked about many phases. So is this kind of the final stages of the potential Trentwood growth or where is this in terms of potential for Trentwood longer term?

Jack Hockema

Yeah. It’s a good question. In the remarks, when I said it combines phase 5 and 6, we actually picked isolated projects from the previous envision 5 and 6. So we’re not doing all of 5 and 6 combined. We’re just doing pieces of each that are specific to what we see our needs to be over the next few years.

We think this will take care of us for a while but we still have remaining pieces that we didn’t do from 5 and 6. And we said we had an envisioned phase 7 out there as well. So we still have opportunities to continue to invest and grow as we see the need. But this will and then second part of your question, this will bump us approximately 10% beginning in 2014, not suggesting we’re going to use that full 10% in 2014.

But we do expect that the current capacity will not be sufficient to meet our needs as soon as 2014.

Timna Tanners - Bank of America Merrill Lynch

Got you. Okay. Thanks very much.

Operator

We’ll go next to Josh Sullivan with Sterne Agee.

Josh Sullivan - Sterne Agee

Good morning, Jack, Dan, Melinda. Great quarter.

Jack Hockema

Hi Josh.

Dan Rinkenberger

Hi Josh.

Josh Sullivan - Sterne Agee

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

Jack Hockema

Well, it’s hard to tell. There are million stories in the naked cities, one of our attorneys used to say to me in the old day. So it really depends on who you talk to but our view is that this system just got ahead of itself. There was all of this job owning for two years about supplier readiness as soon as everybody going to be ready to meet these accelerated build rates and that just led to some additional overhang in the system.

Some of the very situation specific. I mean that’s the general answer. There are situations specific anecdotes where it may relate to a specific model having the build rates move to the right a little bit, those kinds of things but that’s more situation specific whereas I think the general -- it is my opinion and our opinion as we look at the landscape out there. Most of this is just the system got ahead of itself.

Josh Sullivan - Sterne Agee

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

Jack Hockema

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

Josh Sullivan - Sterne Agee

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

Jack Hockema

We are basing it on our discussions with customers and what we expect our customers needs, will be from Kaiser.

Josh Sullivan - Sterne Agee

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

Operator

We’ll go next to Edward Marshall with Sidoti & Company.

Edward Marshall - Sidoti & Company

Good morning to you.

Jack Hockema

Good morning, Ed.

Edward Marshall - Sidoti & Company

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

Jack Hockema

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

Edward Marshall - Sidoti & Company

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

Jack Hockema

No. I think it’s more -- same thing was happening in the stock market and the general economy, each of the past three years if you remember every year in ’10, ‘11 and ’12. I mean, the first quarter was gangbusters. I'm not talking Kaiser. I’m talking for all industrial companies and everybody is really bullish and then it starts to taper off in May and June. And by the time the second quarter earnings call come around, everybody is beginning to get worried about the second half. And then you get to the fourth order and it’s, Oh! My goodness, what happened here?

And that happened three years in a row and it was just and you remember the administration coming out and saying well, we are through the recession now. Everything is hunky-dory. We are back into robust expansion here. I mean that basically was the message in the first half of every year in ’10, ‘11 and ’12. And it's been just the opposite message this year with everything that was going on with taxes and sequestration and all of these other discussions has put more of a damper on the economy.

We really sawed in spades in the fourth quarter and you guys know better than I. But you’ve got that general tone out there that’s been consistent from the fourth quarter through now that, Oh! My goodness where is the economy going and that is a stark contrast to what we’ve seen in each one of the past three years.

So it really comes back. I mean, you get on the margins, what are lead times and all those things. But this is more a function of the total supply chain. It’s not just service centers. It’s everyone through the industrial supply chain, reading the economy. The tea leaves for the economy where they think is headed.

And right now, there's a lot less optimism than there has been in the first half of the prior three years. And hopefully, we will see that correct itself. I mean, we are beginning to see using a term from the first half of the prior three years, some green shoots out there. They are not in line but there are some green shoots out there. So maybe we are going to see some optimism in the second half. Who knows?

Edward Marshall - Sidoti & Company

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

Jack Hockema

In aerospace, unlike general engineering where lead time sometimes are three days. In aerospace, the lead times are longer and the horizon is longer. But we've pretty much been under this cloud and sought already, pretty heavily in the fourth quarter. So it’s been a pretty constant issue in the other than plate products, going clear back to the fourth quarter. And we expect that’s going to continue for a while. We are hearing lots of anecdotes that sound a lot like, what we heard about plate going back three or four years ago. Not quite as great but there is quite a bit of inventory and it’s extrusions, it’s strong tube, it’s rod and bar, it’s wire. So it’s widespread and sheet.

So widespread basically, every product we supply other than plate. I characterize plate differently in the remarks, saying that we've seen some situations shipping instances of an inventory overhang in place, which is very different from the very broad contacts we are seeing it virtually everywhere in the other product. There are some specific instances where there is some access plate from an aerospace standpoint, if that answers your question.

Edward Marshall - Sidoti & Company

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

Jack Hockema

We have much better visibility on the plate because it’s more controlled by a handful of OEMs. We expect -- and I will just talk from a Kaiser standpoint. We are seeing a little bit of impact from these situation’s specific issues in the first half where we think the plate demand will be stronger in the second half than the first half. Even with some of the seasonality that we see in some sectors in the second half of the year.

It’s more difficult to tell in the rest of the supply chain with the rest of the products. We think there'll still be some issues as we get into the second half, although hopefully this starts to loosen up. There are just too many players involved there. It’s really hard to predict where that one is going.

Edward Marshall - Sidoti & Company

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

Jack Hockema

It’s just the aerospace customer. We probably were getting much more specific than that. But it was a take or pay, a feature that we have in our contracts that’s basically given the flexibility to go one way or the other. And I think the contract is pretty clear. So it was not that big issue in terms of -- by talking to them, they just made a choice.

Edward Marshall - Sidoti & Company

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

Operator

We’ll go next to Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs - KeyBanc Capital Markets

Hey, guys. How are you?

Jack Hockema

Good, Phil.

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

Pricing has been holding up so far and we see no indication or no reasons that should be the case going forward. I mean, the one caveat there could be if we got a surge in the underlying price of aluminium, some of the much higher value-added products could get squeeze for a little bit of time. But we don’t see that happening either.

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

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

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

Well, the big part of it will be related to construction on the capital projects at Trentwood. So that comes when we determine we need to do it for the capital project. The Newark is the other major, what would -- we characterize as major maintenance internally. Typically that would be fall in the second half of the year.

We are doing in the second quarter and is what we hope is a temporary lower demand gives us a nice window to do that besides the need to get this work done. So the answer is, it’s probably moving some of the major maintenance to the left from what we would typically see through the year, will have a little bit higher major project expensed second quarter than we typically would have in the second quarter.

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

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

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

In multiple periods other than the first quarter and other than back in 2012. So it’s basically similar type payments first. There are smaller that have happened before. So this was called out because it was larger.

Phil Gibbs - KeyBanc Capital Markets

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

Dan Rinkenberger

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

Phil Gibbs - KeyBanc Capital Markets

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

Operator

We’ll go next to David Katz with J.P. Morgan.

David Katz - J.P. Morgan

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

Jack Hockema

Well, first of all, just too correct it was early 80’s not the late...

David Katz - JP Morgan

Fair enough.

Jack Hockema

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

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

And so we get into lead time issues and delivery issues and capacity issues depending on what mix of orders happens to come in for a certain month or quarter. So and that’s why we choose projects from both of the envisioned Phase 5 and Phase 6, part of this was to get capacity but just as importantly it was putting projects into the mix here that give our folks up at Trentwood more flexibility and more capability to address this very demanding product mix that there producing.

David Katz - JP Morgan

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

Jack Hockema

No. We don’t disclose those numbers and frankly, it’s mix specific but we don’t publish those numbers.

David Katz - JP Morgan

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

Jack Hockema

Well, it depends. We think in total that on average we are going to get regardless of the product mix, order of magnitude to 10% increase in value-added revenue, that’s what the capacity will be if we are running a capacity. But what it does, it will give efficiency or if we hadn’t done it, there are periods where we can't run anywhere near capacity because an order mix could come through that requires us to ideal or whole bunch of equipment does not capable of processing that product mix.

So we sit there with a hotline that start from material because we can't preheat the ingot because we don't have enough furnaces capable of preheating the ingot for that type of product mix. So that’s why big part we are adding some heat treat furnace capacity, which are just processing capacity of plate after it’s been hot rolled but big part of the investment is in the treatment and preheating of the ingots, giving us greater capability to preheat the more demanding product as they go through the hotline.

David Katz - JP Morgan

Okay.

Jack Hockema

Is that answered David.

David Katz - JP Morgan

It does, but I guess if I could just one last attempt, what do you expect the payback on the project to be, the payback period?

Jack Hockema

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

David Katz - JP Morgan

Okay. Thank you.

Operator

We will go next Steve Levenson with Stifel Nicolaus.

Steve Levenson - Stifel Nicolaus

Thanks. Good morning, everybody.

Jack Hockema

Good morning, Steve.

Dan Rinkenberger

Hi, Steve.

Steve Levenson - Stifel Nicolaus

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

Dan Rinkenberger

It's the latter. Basically the contract had terms and conditions and they follow the contract.

Steve Levenson - Stifel Nicolaus

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

Dan Rinkenberger

No. We have this one in particular is -- that was at the end of the contract.

Steve Levenson - Stifel Nicolaus

Okay. Did that customer renew?

Dan Rinkenberger

Pardon me.

Steve Levenson - Stifel Nicolaus

Did that customer renew or entering to a new one.

Dan Rinkenberger

No. We just did, Jack said, I think that before, our forecast is intact, we don’t have concerns about what's going on with our plate forecast with the mix contracts that we had going forward.

Steve Levenson - Stifel Nicolaus

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

Jack Hockema

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

Steve Levenson - Stifel Nicolaus

Okay. Thank you.

Dan Rinkenberger

I’ll point out those, if you look at the aerospace in the first quarter that’s obviously impacted by that $4.5 million in the per pound basis.

Steve Levenson - Stifel Nicolaus

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

Jack Hockema

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

Steve Levenson - Stifel Nicolaus

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

Operator

(Operator Instruction) And we will go next to Lloyd O'Carroll with Davenport & Company.

Lloyd O'Carroll - Davenport & Company

Hello, Jack.

Jack Hockema

Yeah. Lloyd.

Lloyd O'Carroll - Davenport & Company

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

Jack Hockema

We saw some of that in March of orders been push out but I have to say that it hasn’t had a major positive impact on what our expectations is for the second quarter.

Lloyd O'Carroll - Davenport & Company

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

Jack Hockema

Yeah.

Lloyd O'Carroll - Davenport & Company

Okay. Appreciate it.

Jack Hockema

Okay. Thanks, Lloyd.

Lloyd O'Carroll - Davenport & Company

Yeah.

Operator

And we will take our last question from Phil Gibbs with KeyBanc Capital Markets

Phil Gibbs - KeyBanc Capital Markets

Hey, guys. I just had a follow-up. I was looking at, the numbers here a little bit, little bit closer and your guidance is value-added revenue for the first half of this year will be relatively flattish versus ‘12. So assuming that you don't have another true-up payment that would imply a pretty sizable lift in value-added revenues on a sequential basis excluding that, something like 5%?

Jack Hockema

Yeah.

Phil Gibbs - KeyBanc Capital Markets

Am I thinking about it -- am I thinking about that the right way?

Jack Hockema

Yeah. You’re taking too literal.

Phil Gibbs - KeyBanc Capital Markets

Okay.

Jack Hockema

We -- order magnitude were going to be in the same ballpark but…

Phil Gibbs - KeyBanc Capital Markets

Some ballpark, okay.

Jack Hockema

Yeah. If you push me too, I’d say that, if you take out the $4.5 million and put the two quarters together this year it will lower than the two quarters last year in value added revenue.

Phil Gibbs - KeyBanc Capital Markets

Okay.

Jack Hockema

Yeah.

Phil Gibbs - KeyBanc Capital Markets

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

Jack Hockema

Okay.

Operator

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

Jack Hockema

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

Operator

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

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