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Kaiser Aluminum Corp. (NASDAQ:KALU)

Q2 2013 Earnings Conference Call

July 25, 2013; 01:00 p.m. ET

Executives

Jack Hockema - Chairman, President & Chief Executive Officer

Dan Rinkenberger - Executive Vice President & Chief Financial Officer

Neal West - Vice President & Chief Accounting Officer

Melinda Ellsworth - Vice President & Treasurer

Analysts

Dave Katz - JPMorgan

Timna Tanners - Bank of America Merrill Lynch

Steve Levenson - Stifel

Edward Marshall - Sidoti & Company

Josh Sullivan - Sterne Agee

Phil Gibbs - KeyBanc Capital Markets

Tony Rizzuto - Cowen & Company

Operator

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

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

Before we begin, I’d like to refer you to the first two slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management’s current expectations.

For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company’s earnings release and reports filed with the Securities and Exchange Commission, including the company’s Annual Report on Form 10-K for the full year ended December 31, 2012. The company undertakes no duty to update any forward-looking statements to conform the statement to actual results or changes in the company’s expectations.

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

I would not like to turn the call over to Jack Hockema. Jack.

Jack Hockema

Thanks Melinda. Welcome to everyone joining us on the call today. Turning to slide five, our first half 2013 results, while reflecting the impact of mild headwinds, were solid when compared to the first half of 2012.

As we discussed during our fourth quarter and first quarter earnings calls, we are experiencing an inventory overhang for our aerospace applications and this situation continued in the second quarter.

While the inventory overhang is most evident for aerospace products other than plate, there is also some situation specific inventory overhang for plate. We expect the situation to abate somewhat in the second half of 2013 as demand remains strong overall.

For automotive applications, North American builds were up approximately 4% in the first half compared to the first half of 2012. However, as we indicated in our first quarter earnings call, our first half automotive value-added revenue was down slightly from prior year, due to reduced anti-lock break system volume as a consequence of reduced exports and a trend to lighter weight ABS blocks on vehicles.

For general engineering and other industrial applications, following the very weak demand in the preceding fourth and first quarters, modest supply chain restocking strengthened demand in our second quarter. Despite the modest second quarter improvement in demand for our general engineering and industrial applications, the anemic growth trend continues for U.S. manufacturing.

While the U.S. manufacturing economic recovery is feeble, we expect strong long-term demand growth for our aerospace and automotive applications. During our first quarter earnings call we discussed significant organic growth initiatives that position us to continue to grow our aerospace and automotive sales, and to facilitate and enhance the efficiencies across our manufacturing platform.

The Phase 5 expansion at Trentwood will provide additional heat treat plate capacity and manufacturing flexibility and is expected to be online by the end of the year. Our new casting complex at Trentwood will address significant inefficiency inherent with external sourcing of rolling ingot and is currently scheduled to begin ramping up in the second quarter of 2014.

We are also on track with investments in our platform to support new automotive extrusion programs that have been contracted and are scheduled to launch over the next three years.

In addition to investing in value creating organic growth initiatives, we continue to enhance shareholder value during the quarter, with additional share repurchases. We’ve acquired more than $42 million of common stock this year, and we have approximately $80 million remaining for future share repurchases under the board authorization.

I’ll turn the call over to Dan now to further discuss second quarter and first half results, and then I’ll provide some additional color concerning our short-term outlook. Dan.

Daniel Rinkenberger

Thanks Jack. As Jack mentioned, our first half 2013 results reflected the modest headwinds we had discussed in our prior earnings calls. Most notably, a minor inventory overhang that had built up in pockets of the aerospace supply chain during the supplier readiness induced demand surge last year.

Value added revenue of $371 million for the first six months of 2013 was down 2.5% from the record first six months of 2012, reflecting lower demand across all end market applications.

Despite the decline in value added revenue, adjusted consolidated EBITDA for the first half of 2013 improved 2% to $92 million compared to $90 million for the first half of 2012. Both value added revenue and EBITDA benefited from the $4.5 million aerospace customer contract payment that we discussed in our first quarter earnings call.

Adjusted EBITDA margin also increased to 24.8% in the first half, up from 23.7% in the prior year period. Excluding the $4.5 million customer payment, our adjusted EBITDA margin for the first half was 23.9%, reflecting steady operating efficiency in our business.

On slide seven we showed key consolidated financial metrics. Consolidated operating income as reported of $90 million in the first half included $12 million of non-run rate gains, which are detailed in the appendix of this presentation. Adjusted for these non-run rate gains, first half consolidated operating income was $78 million, a slight improvement over the prior year period.

For the second quarter, consolidated operating income as reported of $40 million was comparable to the prior year quarter. However, adjusting for non-run rate gains, consolidated operating income was $37 million for the second quarter, down $2 million from the prior year quarter and $4 million from the first quarter of 2013.

Reported net income for the first six months of 2013 was $52 million or earnings per diluted share of $2.70. For the second quarter, reported net income was $19 million or $0.98 per diluted share.

Adjusting for non-run rate items, as well as a favorable audit settlement in the first quarter that reduced our Canadian income taxes, net income was $37 million for the first six months and $17 million for the second quarter or adjusted earnings per diluted share of $1.93 for the six-month period and $0.91 for the quarter.

Our effective tax rate for the second quarter was 38%. The first half of 2013 effective tax rate however was 28%, which reflects the Canadian tax benefit I mentioned earlier. Our cash tax rate remains in the low single-digit percentages though as we continue to apply our net operating loss carry-forwards.

Capital spending in the first half of 2013 totaled $26 million, and we continue to expect capital spending for the year to total approximately $80 million. We purchased approximately 650,000 shares of our common stock for slightly over $40 million in the first six months of 2013, and liquidity remains strong as of June 30, with cash and short-term investments totaling $329 million and revolving credit availability of $259 million.

And now Jack will discuss current industry trends and our business outlook. Jack.

Jack Hockema

Thanks Dan. Turning to slide eight, our outlook for aerospace and high strength applications is positive. Airframe orders so far this year exceed the expected full-year builds, and we anticipate that end of the year 2013 backlog will grow once again from the already significant 2012 end of year backlog that exceeded eight years.

Regarding our outlook for the second half of 2013 for these applications, we anticipate that reduced pressure from supply chain de-stocking and reduced construction interference at Trentwood will offset normal second half seasonal demand weakness.

Turning to slide nine and automotive, while we expected industry build rates will be off approximately 4% in the second half compared to the first half due to normal seasonal factors, we expect increased dollar per vehicle content for our automotive extrusion applications will more than offset the reduced build rate as new programs ramp up in the second half.

Turning to slide 10 and general engineering, while we are encouraged by improved demand for our products in the second quarter, compared to the very weak demand in the prior two quarters, the feeble U.S. manufacturing economic recovery continues. Our current view is that the second half for our general engineering and industrial applications will exhibit typical seasonal demand weakness.

Turning to slide 11 and summary of our short-term outlook, overall we expected strengthening underlying demand for Kaiser’s aerospace and automotive products will essentially offset the effects of normal seasonal weakness in the second half. We anticipate that value-added revenue will be similar to the first half and that adjusted EBITDA margin will be similar to the 2012-2013 run rate.

Turning to slide 12 and summarizing our remarks for the day, we see signs that the headwinds in our end markets are moderating and we continue to be very optimistic regarding the longer-term outlook for continued secular demand growth for 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 our aerospace and automotive applications in the years ahead.

Longer term, we’ll continue our practice of maintaining financial strength and flexibility to invest organically, pursue potential acquisitions and enhance returns to shareholders with regular dividends and through moderate share repurchases as appropriate.

We’ll now open the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we will take our first question from Dave Katz with JPMorgan.

Dave Katz - JPMorgan

Howdy. I appreciate the color, especially on the segment-by-segment basis as always. When you emphasize that you have $80 million left on the repurchases, are you anticipating undertaking those at the same kind of run rate fees that you have in the first half of 2013?

Jack Hockema

Not necessarily. I think we’ve got a relatively moderate pace going on, but the $80 million is not with any particular timeline in mind. Purchases were a little lighter in the second quarter and by design we're purchasing a little bit less at higher prices and a little bit more at lower prices.

Dave Katz - JPMorgan

Okay. And then when you indicated that you expect second half 2013 adjusted EBITDA margin to be somewhere in 2012 to 2013 run rate, I was hoping to just drill in a little more. Over that period by my calc, the margin has varied from 20.8% to 25.9%. Are you saying that they could be anywhere between there or your saying that it would be in closer to the average of that?

Dan Rinkenberger

Well, we’re not going to get that granular, but if you exclude the $4.5 million payment in the first quarter last year, we've been running – I'm sorry, in the first quarter this year, we've been running 23.5% to 24%. So we see we are going to be in that 24% range, plus or minus a percent or so. I mean, again, it's tough to be that granular. It bounces around as you saw.

Dave Katz - JPMorgan

Okay. And then finally you emphasized that you would continue to look at acquisitions. Have you seen the market availability change as your inclination to dip your toe in change?

Jack Hockema

No, the situation is pretty much as we've described on the past couple of earnings calls.

Dave Katz - JPMorgan

Okay. Thank you very much.

Jack Hockema

Okay. Thank you Dave.

Operator

And we'll take our next question from Timna Tanners with Bank of America Merrill Lynch.

Timna Tanners - Bank of America Merrill Lynch

Hey, it's morning out there, so I guess good morning.

Jack Hockema

Yes, good morning Timna.

Timna Tanners - Bank of America Merrill Lynch

Thanks. I appreciate the brevity of your opening remarks and the clarity of the presentation, but I do have a bunch of questions for you.

Jack Hockema

Sure.

Timna Tanners - Bank of America Merrill Lynch

One is that there's a pass-through structure for your company traditionally for the most part, but we are seeing some weakness in the mid-west premium or at least a little bit. Can you comment on what that could look like or what, if any impact we might see on your business from a softening mid-west premium?

Jack Hockema

No impact at all. We pass through based on the mid-west price.

Timna Tanners - Bank of America Merrill Lynch

Okay. So unless there were a sudden collapse and some difficulty in passing that through you would expect that that structure would be maintained?

Jack Hockema

Well, we pass through based on the mid-west price. So I mean, it went up $0.04 and it typically has been about $0.08. It got up to $0.12 or $0.1225 or so, and again, that's transparent to us, because we're passing through based on the mid-west price; that's the standard in the U.S. marketplace.

Timna Tanners - Bank of America Merrill Lynch

Okay. So you wouldn't expect any weakness or risk there?

Jack Hockema

No.

Timna Tanners - Bank of America Merrill Lynch

Okay, great. The other questions I had, I mean we also want to understand a little bit better, if we take a step back the company's opportunity here is clearly that there is a good cash flow story and you can buy back shares.

You can have a Trentwood growth story that you've identified and given us some detail on. But can you just remind us some of the other growth opportunities or the other ways that Kaiser's positioning itself? I mean, what are the other expansion opportunities? You've done some acquisitions. What's the upside on some of those other areas that you've talked about in the past?

Jack Hockema

Well, the big one, although it's a smaller share of our portfolio than aerospace, is automotive, and frankly we see as much or more growth in automotive over the next several years as we do in aerospace and we're investing there. So we see that as a significant opportunity.

And the other opportunity; a lot of the margin improvement that we've seen over the years is a function of improving our operating efficiencies and we continue to do that and still see significant opportunities. We're nowhere near our full potential in terms of the efficiency and the performance of our business.

One example of that is the investment we're making with $35 million order of magnitude at Trentwood in a new casting unit complex, and we have a lot of opportunities and anticipate quite a bit of investment over the next five years for projects similar to that. So it's really growth in automotive and aerospace, internally growth in automotive and aerospace and continued improvements in operating efficiencies, as well as looking for opportunistic acquisition opportunities.

Timna Tanners - Bank of America Merrill Lynch

Got you. Okay, and then the final one I wanted to ask about is, we've seen a lot of turnover in management in our last couple of just weeks really in the broader metals and mining space in the U.S. and I just looked up your age; it says you're 66.

I've asked this before and I don't mean to be offensive, because I've known you for a while and you do a good job, but could you give us any update on succession plan thinking or are there other people in the firm that are getting trained or getting brought up to speed that we might not know about?

Jack Hockema

Yes, certainly. Succession planning is a focus of ours and has been for several years, even though I'm a very young 66 as you know.

Timna Tanners - Bank of America Merrill Lynch

Of course, yes, yes.

Jack Hockema

Yes, but we have a robust succession planning system and process internal with the company and we have a very, very strong management team here that's been together for quite sometime. So we're very comfortable. The Board and I are very comfortable that we've got good, solid succession plans in place if I get run over by a truck.

Timna Tanners - Bank of America Merrill Lynch

Okay, God forbid and thank you.

Operator

And we'll take our next question from Steve Levenson with Stifel.

Steve Levenson - Stifel

Thanks, good morning or afternoon, as the case may be.

Jack Hockema

Good morning.

Steve Levenson - Stifel

Watch out for those trucks.

Jack Hockema

Yes.

Steve Levenson - Stifel

When you were talking about investments that you've made and opportunities, I know at the air show we talked about the Kaiser select product. Could you give us an idea, what percentage of the mix that is right now; how pricing differs from other products and where you think it's headed please?

Jack Hockema

I'm going to ask here generally, because I don't have statistics at my fingertips. In terms of the volume, I’d say a considerable portion of our aerospace plate is Kaiser Select. All of our rod and bar out of our Kalamazoo, Los Angeles and Sherman, Texas facilities, that's all Kaiser Select. A significant portion of our general engineering plate out of Trentwood is Kaiser Select and beyond that we don't call it Kaiser Select, but in reality, all of the automotive products that we produce are Kaiser Select.

They use the same standards and philosophies. We just don't brand them with Kaiser Select as we do our aerospace and some of our general engineering products. So a pretty significant portion of our portfolio is Kaiser Select, and as you know when we talked about it in more granularity over in Paris, we have several levels of Kaiser Select.

For example, on plate there are four or five different varieties of Kaiser Select and we continue to expand upon those as we determine specific customer needs and address those issues.

In terms of pricing, the answer is, it depends. For some Kaiser Select applications we get pretty significant premiums. For others, we don't get that much of a premium, but we still get repaid for it, because we get it in terms of market share. So it really depends. We get value for Kaiser Select, but that value comes in a variety of ways.

Steve Levenson - Stifel

Got it. Thanks a lot. I’ll have to try to plug that in a little bit. The other thing is that we’ve been surveying distributors and it sounds like there’s not much investment in inventory in an attempt to try to keep things low. What do you think it takes for them to see demand spurred and to begin some restocking activity? I know you’ve got overhangs in some products, but others sounds like not so much.

Jack Hockema

Yes, well, let me talk separately about aerospace and about general engineering. When you are talking about general distributor inventories, most of that’s general engineering related and it’s at a very low level and it’s not moving because the U.S. manufacturing economy has gone nowhere for about seven or eight years now.

I mean we are still basically where we were in terms of the U.S. manufacturing in 2005 and 2006. So there’s just very little demand growth there to stimulate anything happening. So all it would take is a little bit of recovery in the U.S. manufacturing economy that we’ve not yet seen, and once that happens we’ll start to see lead times move out for the mills and then that will lead into the virtuous cycle of getting into some restocking.

From an aerospace standpoint, the overhang that we are seeing, we don’t think that, and I just got some comments from the Reliance call too. I think what Dave and his team were saying is that they don’t think there is much aerospace inventory overhang at the service centers, and we think that’s true.

So there is some in the service centers, as Dave said, I think beyond reliance, but it’s really the entire supply chain. It goes back to the rate readiness initiative and where Boeing and Airbus were out pounding on all of their suppliers to get ready for these very aggressive build rates that they are moving upon and the entire supply chain.

You’ve got hundreds, hundreds and hundreds of machine shops out there for example. So you get the entire supply chain that got ramped-up on this rate readiness and I think it's more a function of the entire supply chain and there is some in some situation specific cases even at the OEMs.

So that’s a much more difficult situation to gauge. However, I think it all goes back or most of it goes back to the rate readiness initiative and the system just got a little bit ahead of itself in late 2011 and early 2012.

We see that beginning to dissipate more so in plate than the other products, but we see it abating really across the board and I think we’ll gradually see us get back to where we are supplying to the actual build rate.

Steve Levenson - Stifel

Thanks for all the additional detail.

Jack Hockema

Thank you, Steve.

Operator

And we will take our next question from Edward Marshall with Sidoti & Company.

Edward Marshall - Sidoti & Company

Good morning.

Jack Hockema

Hi, Ed.

Edward Marshall - Sidoti & Company

Hello. So I just wanted to talk, and I don’t know that we’ve done this in the past. I wanted to see if we can kind of drill into maybe some of the projects you’ve done, you’re anticipating in particular the plate projects.

You mentioned some efficiency upgrade and de-bottlenecking, etcetera, and I’m kind of curious what that does from say a margin perspective or cost perspective, whether you want to address that, maybe in EBIT or EBITDA, whatever is easier for you or what numbers you have. Just kind of from a cost perspective, what type of benefits do you expect to receive from the de-bottlenecking and the efficiencies?

Jack Hockema

Well, the Phase 5 expansion gives us order magnitude around 10% increase in our plate capacity, 5% to 10%, but I think it’s closer to 10%. But it also gives us some pretty significant improvements in flexibility that will relate to efficiencies through the manufacturing process. We’ve estimated what those are, but we really won’t know until we implement those, but we think it’s going to have some real benefits.

The $35 million project for the new casting unit at Trentwood, that gives us theoretically capacity, because it will improve our efficiencies through the mill, with the type of ingot get we’ll be able to cast there. But it’s primarily a cost reduction project.

All I’ll say is that if you put the two projects together, they’d add up to $80 million combined, I believe, $45 million and $35 million. We have an attractive return on investment to IRR on those. That’s well above our cost to capital.

Edward Marshall - Sidoti & Company

Okay. And then I kind of want to talk about maybe, if we could drill in just on the aerospace overhang and maybe you can talk about the cadence through to the quarter. Has that improved or did it stay consistent or did it deteriorate as far as the order pull and the cadence on the aerospace. Call it plate, but also call it on the remaining piece of the aerospace as well.

Jack Hockema

Well, most of the overhang affecting us is on the products other than plate, and we saw a little bit of easing there, but not much. We think that we’ll see improvement here in the second half, but our visibility really is pretty short on those products in contrast to plate.

On plate, frankly most of the issues were internal issues. We had equipment outages and a lot of production disruption at Trentwood related to the construction. So it was less a function of having orders at Trentwood than it was having the ability to get it through with the three ring circus that’s going on up there right now.

I was just up there a couple of weeks ago and I walked through the plant and I’m amazed at what our team’s able to do up there with the magnitude of disruption going on in the place. It’s like the whole plant is under construction when you walk through there.

So they are doing a fantastic job up there, but we are not seeing the overhang affect us that much and plate and we don’t think it will affect us. That’s why I say it’s situation-specific from a plate standpoint. We think we’ll have good, robust volume here in the second half from a plate standpoint.

Edward Marshall - Sidoti & Company

You said you mentioned that your visibility is short and I imagine, and I just want to see what your opinion is on this, but you mentioned earlier in the call that its held a lot of the machine shops and not so much on the service centers.

I imagine with the select service centers that you use, you probably have a good indication as to what the inventories are there. Is it a little bit harder for you to kind of gauge this supply chain and maybe the inventory overhang as it’s kind of in a fragmented machine world as opposed to maybe through the distributors?

Jack Hockema

Its extremely difficult, Ed. I mean it’s really anecdotal. We have nothing tangible to tell us what’s going on from an inventory standpoint, other than anecdotes that we pick up out in the field, and we triangulate with a lot of our customers and with a lot of people in the industry. So we are pretty confident in our comments here, but there’s nothing quantitative to back it up.

Edward Marshall - Sidoti & Company

So, it’s more about the demand that you’re seeing in the aircraft overall, the backlogs that they have from the OEM side and then just kind of what you assume at some point, that’s got to open up and supply’s got to match demand. Is that kind of where…

Jack Hockema

Yes, exactly. If you look at it this year airframe builds are up 6% and clearly we are not seeing a 6% increase in demand in our products other than plate. So it’s clear that there was some restocking last year and there’s some de-stocking if you will this year, because demand is flatter even down frankly and our non-plate products in aerospace.

Edward Marshall - Sidoti & Company

And last one if I could. Just remind me what ABS is as far as -- I mean I know what the application is, but as a percent of sales maybe in the automotive division, how much would you supply into that?

Jack Hockema

Oh! automotive is 8% or so. Order of magnitude, it’s less than half of that 8%.

Edward Marshall - Sidoti & Company

Okay. Thanks guys.

Operator

(Operator Instructions). We’ll take our next question from Josh Sullivan with Sterne Agee.

Josh Sullivan - Sterne Agee

Good morning, Jack, Dan.

Jack Hockema

Hey Josh.

Dan Rinkenberger

Hey

Josh Sullivan - Sterne Agee

So, in the aerospace side, given the backlogs with the OEMs and all the new programs coming online, if we take a step back and look at the competitive environment, are others making the kind of investments Kaiser is keeping up volume-wise? And then secondly, with Boeing’s partnering for success program, how is that impacting that environment?

Jack Hockema

On the first in terms of expansion, among the majors, we believe there is some expansion going on there. I don’t know if it’s of the magnitude of what our expansion has been, but there’s some expansion there, and then there are some mills in China coming on stream and others. I characterize them as second tier suppliers who’ve added capacity and who are seeking to penetrate the market.

So there is a little bit of growth in terms of capacity. But at this point, we see a pretty robust supply/demand balance here. There is certainly not a shortage of capacity, but nor is there a gross oversupply of capacity either and we think it’s going to be pretty much an equilibrium here for the next few years.

In terms of the Boeing partnering for success, we don’t speak directly to our specific customer contracts. I’ll just make a general comment and that is, we have a strong book of aerospace contract business that positions us to continue well into the future to grow our top and our bottom line. So we have a nice book of business here for several years going forward.

Josh Sullivan - Sterne Agee

Okay, great. And then can you quantify the construction headwind in the quarter? Maybe you did, I missed it.

Dan Rinkenberger

It costs us a few million pounds probably at Trentwood. Yes, in terms of throughput, the order magnitude, yes

Josh Sullivan - Sterne Agee

And then just lastly on the general engineering side, it looks like the volumes picked up a little bit, but pricing did not. Is anything going on there?

Dan Rinkenberger

Yes, pricing was pretty stable across the board I would say. Yes, and it picked up a little bit. Frankly, we were a little surprised. We saw some restocking. We quantitatively, we can measure what’s happening at rod and bar and its in the appendix. There’s a chart in if you go and look back in the appendix.

I don’t know which slide it is, but there is a MSCI chart in there and the chart on the right hand side actually shows the service center inventories and you can see they spiked up in the second quarter. So there was a little bit of artificial demand that was welcome in the second quarter here in rod and bar.

Josh Sullivan - Sterne Agee

Okay, good. I’ll jump back in the queue. Thanks.

Operator

We’ll take our next question from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs - KeyBanc Capital Markets

Good morning.

Jack Hockema

Good morning, Phil.

Phil Gibbs - KeyBanc Capital Markets

Jack, you’ve had de-stocking in the first half across your aerospace business, particularly in the margin rich non-plate side. You’ve had outages in the second quarter and this year I believe at Trentwood and you’ve been able to maintain your margin profile essentially over the last six months at levels well ahead of 2011. My question is basically as this margin strength in the face of even some headwinds surprising to you?

Jack Hockema

No. I mean pricing is basically the same. The volumes are similar to a year ago and I’m factoring out the $4.5 million worth of perfume that was in the first quarter here. So we are basically performing at the same kind of margin level as we did last year. And as I said, I’m amazed at the job our folks at Trentwood are doing with all the disruption they are having out there, and we are getting some improvements.

Kalamazoo continues to improve. The whole common alloy system is continuing to make some improvements there. So no, we are not surprised. We’ve had pretty solid underlying performance considering the factors that our folks were dealing with out there.

Phil Gibbs - KeyBanc Capital Markets

Okay, and if you assume some of this de-stock ebbs in the second half and you do get the aero airframe built up side in ’14 relative to ’13, it would be reasonable you think to assume that you have a very strong ‘14 on your hands at this point?

Dan Rinkenberger

Well, ‘14s still a long ways away. Based on what we know right now, we fully expect that 2014’s going to be another record year for value-added revenue, adjusted EBITDA, similar to 2013 and 2012, all of which we think were three consecutive years of records here, but who knows what’s going to unfold as we get closer to ’14 here.

Phil Gibbs - KeyBanc Capital Markets

And then my last one is just on some organic investment. Do you have the ability within your current configuration to potentially diversify your mix into some of these aluminum lithium applications? Is that something…

Jack Hockema

Yes, absolutely. We can supply aluminum lithium today and we could grow that. Right now it’s really a casting problem. In terms of the rest of the processing, it goes through the same facilities as our other extrusions and/or sheet and plate products. So it’s really a matter of casting, and we do that.

We have a developmental caster in our operation at Newark, Ohio, which is where we develop that capability, so we can cast billets and rolling ingot in Newark to supply small applications, and if the market ever develops to be a substantial market, we’ll make investments as required to participate.

Phil Gibbs - KeyBanc Capital Markets

Okay. Thank you very much.

Operator

And we’ll take our last question from Tony Rizzuto from Cowen & Company.

Tony Rizzuto - Cowen & Company

Hi Jack, Dan and Melinda. How’s everyone?

Jack Hockema

Hey Tony.

Tony Rizzuto - Cowen & Company

Good. As always a lot of very good color. We appreciate that very much. I just wanted to follow up a little bit. So you’ve had all this dislocation going on as you’re building out and increasing the different phases of expansion, etcetera, and looking at 2014, would you expect that to calm down quite a bit for the calendar year?

Jack Hockema

Yes.

Tony Rizzuto - Cowen & Company

All the activities, yes?

Jack Hockema

Yes, I mean Pete Bunin was actually commenting on that in our last staff meeting here, that we really haven’t had “normal operations” at Trentwood for two or three years here. So although we’ll still have some construction underway in the cast house in the first half of the year as that comes up during the second quarter. But it will be stabilized and we are hoping to keep it pretty stable, because frankly, it’s hard for us to tell what we really have up there. We’ve had so much disruption.

We think there’s a lot of potential, untapped potential in the operation and hopefully by the first half, but certainly by the second half, things will be settled down and we’ll start to get a better fix on how things look and we think it will look better.

Tony Rizzuto - Cowen & Company

Well, it’s got to be a real challenge. You must be quite pleased because you’ve been able to maintain those margins pretty high. But in the past, you’ve talked about possibly attaining levels, EBITDA margins in the 25% to 30% range. Is that still do-able in your eyes and how confidant are you with getting there?

Jack Hockema

Absolutely. Very confident, very confidant. Our long-term proposition remains intact for value-added revenue, well into the 800s and margins in the high 20s.

Tony Rizzuto - Cowen & Company

Okay, great. And I just wanted to follow-up on that partnering for success. I also had just a question on a little bit of a variation and I know that Boeing, they’ve been pretty vocal in the last six to nine months about renegotiating existing supplier contracts to get lower prices.

And I know that you can’t comment about specific contracts, but can you give us a qualitative feel for how this might be affecting you and are you comfortable that if there is some pressure on the cost side, that the things you are doing, the types of product mix, cost reduction, etcetera, that you are very handily able to offset those pressures?

Jack Hockema

Well, I’ll just repeat some of the sound bytes that I gave you Tony, but I think it will answer your question. We have a very strong book of aerospace contract business that runs several years. So you can assume from that, that it’s basically all of our major customers. We’ve got those set for several years.

I answer another question by saying that all things being equal, if there aren’t any big surprises lurking out there, what we know about our book of contract business and what we expect about the rest of our business, we expect that 2014’s going to be another record year, and we said that our long-term potential is intact for value-added revenue in the high 800s, end margin in the high 20s.

So basically, and most of our contracts have turned over or are turning over next year. So we’ll have all new contract business as compared to where we were in 2007-2008 by the time we get to 2014. So those projections I made are based on the contracts that we see for the next few years.

Tony Rizzuto - Cowen & Company

Okay. And just one final question; as you guys are getting increasingly qualified on new programs on the auto side and Kalamazoo, how is that moving forward compared to your expectations in terms of the benefits you are seeing from your investments there?

Jack Hockema

They are doing well. And I guess I should put a caveat. I talked about hopefully lack of disruption at Trentwood next year, but there are a lot of moving parts going on in the automotive segment of our business and that will be going on through 2014.

So Pete Bunin and his team are dealing with a lot of variables in addressing that, moving product around and launching a myriad of new programs, which is all good news, but it is a very significant manufacturing challenge.

So we are going to have some tough challenges second half of this year and going into 2014 with everything that our automotive group has on their plate, but as of now, they are doing a great job of digesting all that volume and managing it and we think we’ve got the resources in place to manage it, but it’s going to be a tough putt, as they got some real challenges ahead of them.

Tony Rizzuto - Cowen & Company

All right, and I just wanted, because you mentioned on the Reliance call, I asked the question, you probably heard it. I asked the guys a question about some of the things that I was hearing in the marketplace and, is some of the situation that may be occurring right now, that maybe in your own operations you might be dipping down as other mills are, into some of the, say some of the 6,000 series and that’s creating some – maybe a bit of margin pressure in some of those areas? Is that possibly happening for you?

Jack Hockema

Are you saying that we’re using 6X plate to replace aerospace plate? Was that the question?

Tony Rizzuto - Cowen & Company

No, no, it’s that maybe because of a bit of an overhang in some of the 2,000 and 7,000 series, and maybe some of that material maybe being redirected to more general engineering where the 6,000 series, where maybe it’s meeting with competition from other sources, maybe some foreign material as well. Is there a little bit of pricing pressure going on perhaps there?

Jack Hockema

There may be some of that happening with our competitors, although we don’t see much difference right now in general engineering plate from what we’ve really been experiencing for the past two or three years. But there is some short-term pressure on some of the spot prices, even on aerospace plate, which we think is a reflection of what’s going on with some of our Tier 1 competitors, but that's not had a big impact to-date.

Tony Rizzuto - Cowen & Company

All right.

Jack Hockema

Yes, hopefully as the inventories come back and balance, we’ll see that pressure recede.

Tony Rizzuto - Cowen & Company

All right, thanks so much. I appreciate all the color on that. Thank you.

Jack Hockema

Sure Tony.

Operator

It appears there are no further questions at this time. I’d like to turn the conference back to Mr. Jack Hockema for any additional or closing remarks.

Jack Hockema

Okay, thanks everyone for joining us on the call. We look forward to updating you again on our third quarter call in October. Thank you.

Operator

And that does conclude today’s conference. We thank you for your participation.

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