Kaiser Aluminum's (KALU) CEO Jack Hockema on Q2 2016 Results - Earnings Call Transcript

| About: Kaiser Aluminum (KALU)

Kaiser Aluminum Corporation (NASDAQ:KALU)

Q2 2016 Results Earnings Conference Call

July 21, 2016 01:00 PM ET

Executives

Melinda Ellsworth - Vice President, Investor Relations & Corporate Communications

Jack Hockema - Chief Executive Officer and Chairman

Keith Harvey - President and Chief Operating Officer

Dan Rinkenberger - Executive Vice President and Chief Financial Officer

Neal West - Vice President and Chief Accounting Officer

Analysts

Andrew Quail - Goldman Sachs

Edward Marshall - Sidoti & Company

Tony Rizzuto - Cowen and Company

Paul Luther - Bank of America

Evan Kurtz - Morgan Stanley

Phil Gibbs - KeyBanc Capital Markets

Jorge Beristain - Deutsche Bank

Curt Woodworth - Credit Suisse

Presentation

Operator

Good day, everyone and welcome to the Kaiser Aluminum Second Quarter 2016 Earnings Conference Call. Today's call is being recorded.

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

Melinda Ellsworth

Thank you. Good afternoon, everyone and welcome to Kaiser Aluminum’s second quarter 2016 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 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 and Form 10-Q for the quarter ended June 30, 2016. The Company undertakes no duty to update any forward-looking statements to conform the statements to actual results or changes in the Company s expectations.

In addition, we have included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation. Any reference in our discussion today to EBITDA means adjusted EBITDA which excludes non-run rate items for which we’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?

Jack Hockema

Thanks, Melinda. Welcome to everyone joining us on the call today. As you saw in our earnings release, our strong three month and six months results reflect solid demand for our aerospace, automotive and general engineering products, and strong sales margins from price increases implemented late last year as well as benefits from low contained metal costs. We also continue to achieve improved underlying manufacturing cost efficiency. Our Trentwood facility continues to increase efficiency and throughput from investments in the Phase 5 expansion and the new casting complex, and we expect to continue to extract additional benefit from these investments as we further enhance our production processes.

In addition, underlying cost efficiency continues to improve in our automotive focus facilities as these plants adapt to more than 70% sales growth over the past 2.5 years. The $150 million multiyear capital investment program at our Trentwood facility is progressing as planned and we anticipate the first phase of incremental cost efficiency and capacity will come online in early 2018.

I’ll now turn to Dan for additional color regarding the second quarter and first half results. Dan?

Dan Rinkenberger

Thanks Jack. On slide 6, we show historical three and six months value added revenue. In 2015, both the second quarter and the first six months were record periods for value added revenue. This year, we exceeded the prior year levels with the second quarter 2016 value added revenue increasing 1% over the second quarter of last year on 3% lower shipments. Similarly, value added revenue for the first half of this year improved 4% compared to the record first half of 2015. Strong demand across our strategic end market applications supported second quarter and first half value added revenue growth.

Aerospace and high strength value added revenue was up 1% in the second quarter and 6% in the first half of 2016, compared to the respective prior year periods reflecting improved pricing and the continued benefits of lower contained metal costs. Automotive extrusions value added revenue also improved 1% in the second quarter and 6% in the first six months of the year over the comparable prior year periods. The improvements reflected favorable shift in product mix as the current year automotive shipments include new programs for chassis and structural applications that launched during the latter part of 2015, partially offset by end of life cycle programs that have been rolling off this year.

Year-over-year general engineering value added revenue increased 7% in the second quarter 2016 on 9% higher shipments, and for the first half of 2016, general engineering value added revenue grew 5% over the prior year period on 7% higher shipments. In addition to shipment growth for most of our general engineering product categories, the 2016 period benefitted from favorable pricing on long products and lower contained metal costs. Value added revenue for our non-core other products decreased in both the second quarter and the first half of this year relative to the prior year periods as we continue to redirect production capacity to our strategic applications.

On slide 6, we reviewed EBITDA and EBITDA margin. EBITDA in the second quarter of 2016 improved to $55 million from $52 million in the prior year quarter, reflecting a favorable year-over-year impact of $7 million from sales partially offset by a $5 million increase in overhead and employee benefit expense. Underlying manufacturing efficiencies continue to improve in the quarter as our EBITDA margin improved to 26.6% from 25.8% in the prior year quarter. EBITDA in the first half of 2016 increased $12 million compared to the prior year period to $110 million with EBITDA margin increasing to 26.4% from 24.5%.

The first half of 2016 benefitted from a favorable $20 million sales impact and the $4 million impact from improved underlying manufacturing efficiencies. The sales and efficiency improvements were partially offset by a $12 million increase in overhead and employee benefit expense, reflecting salary and benefits inflation and increases to incentive and worker's compensation accruals. Of our benefits, employee medical cost trends are the most concerning, threatening a growing adverse impact in the future at the current growth rate.

Turning to slide 8, consolidated operating income as reported of $58 million for the second quarter included $12 million of non-run rate gains. Adjusting for these non-run rate items, second quarter consolidated operating income was $46 million, improving $2 million over the prior year quarter on improving sales and underlying manufacturing efficiencies partially offset by higher overhead and employee benefit expense.

For the first half of 2016, reported consolidated operating income of $103 million included $10 million of net non-run rate gains. Excluding these non-run rate items, the first half consolidated operating income was $92 million. This was a $10 million improvement over the first half of 2015 as a $2 million increase in depreciation expense partially offset by $12 million EBITDA improvement that resulted from improved sales and efficiencies offset by higher overhead and benefits costs.

Our effective tax rate was 37.7% for the second quarter and 37.1% for the first half of 2016, and we continue to apply our net operating loss carry forwards resulting in cash tax rates in the low single digits. Reported net income for the second quarter was $26 million or $1.43 per diluted share and for the first half of 2016 was $52 million or $2.87 per diluted share. Adjusting for non-run rate items, net income was $19 million for the second quarter and $46 million for the first half or adjusted earnings per diluted share of $1.02 for the quarter and $2.52 for the first half of 2016. Reported and as adjusted EPS in the second quarter included a one-time $0.38 per share impact from the early retirement of our 8.25% senior notes.

Capital spending totaled $42 million in the first six months of 2016, and for the full year we expect total capital spending will be approximately $80 million. During the first half of 2016, we paid $16 million in quarterly dividends and repurchased approximately 109,000 shares of our common stock for $8.6 million at an average price of approximately $79 per share. At June 30th, approximately $115 million remained available under our Board authorization for further share repurchases.

In the second quarter, we took advantage of favorable market conditions to refinance our 8.25% unsecured senior notes due June 2020 with a new $375 million issuance of 8 year unsecured senior notes with an interest rate of 5% and 7% to 8% and a maturity of May 2024. On June 1st, we redeemed all of the 8.25% senior notes that remained outstanding being $198 million of principal, $8 million of interest and an $8 million call premium. The redemption required us to write-off $3 million of unamortized deferred financing costs, which along with the $8 million call premium triggered $11 million of redemption related expense. This was recorded in other income and expense and as I mentioned a moment ago, had a onetime impact on EPS of $0.38 per share in the second quarter.

As of June 30th, cash and short-term investments totaled $267 million and unused availability under our revolving credit facility was approximately $280 million. We ended the quarter in a stronger financial position with the flexibility to continue investing in attractive projects for long-term value creation while also returning cash for our shareholders through share repurchases and dividends.

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

Jack Hockema

Thanks Dan. Turning now to slide 9, as Dan mentioned in his review of the first half results, we achieved 6% year-over-year value added revenue growth for our aerospace and high strength applications. Customer demand for both our plate products and our long products is solid and our value added revenue is also benefitting from low contained metal costs. We expect these positive trends to continue into the second half and are raising our full year value added revenue outlook for these applications to reflect year-over-year growth slightly above the previous outlook for 5% growth.

Longer term, the outlook is bright for these applications. The Joint Strike Fighter is ramping up. The current backlog of more than 9 years for commercial airframe is an all-time high. Both Boeing and Airbus recently increased our outlook for long-term demand for airframes and Kaiser is very well positioned to participate in the long-term growth with our customers.

Turning to automotive extrusions, we are reducing our outlook from approximately 10% to approximately 6% year-over-year value added revenue growth. As expected, we are experiencing end of lifecycle programs rolling off; however, one program has terminated sooner than we anticipated, also while new program launch schedule remain robust. One platform is ramping up at a slower than anticipated pace. This revised 2016 outlook is related to timing, not to underlying demand, and does not change our long-term outlook for continued aluminum extrusion content growth for our automotive served market segments. Our previous outlook for North American build rates are modest 1%. Compound annual growth rates are slightly over 18 million units by 2018 is also intact. We remain optimistic regarding secular demand growth from our core aerospace and automotive served market segments.

Turning to slide 10, we experienced stronger than anticipated demand in the first half for our general engineering applications. In the second half, we anticipate reduced seasonal demand for these applications similar to what we experienced last year. We continue to experience pricing pressure from imports of general engineering plate, and we expect an impact of approximately $2 million in the second half compared to the run rate during the first half.

Moving to slide 11, we reiterate our outlook for year-over-year value added revenue growth of 3.5% with improvement in EBITDA and margin being driven by sales growth and continued improvement in manufacturing efficiencies. In the second half, we expect normal seasonal demand weakness, similar to last year, we have significant plant major maintenance in the second half, and we expect that the cost impact will be $5 million to $6 million higher than the first half with most of that higher cost in the third quarter. In addition to the import price pressure on general engineering plate, we could experience sales margin compression on certain high value added products, if aluminum raw material costs escalate. That said, we do not expect an appreciable impact if any in the second half.

Turning to slide 12 and a summary of our comments today, first half results were driven by strong sales as well as improved underlying manufacturing cost efficiencies. We expect that these drivers will continue to be the storyline throughout 2016. Looking longer term, we remain well positioned for further profitable growth and shareholder value creation beyond 2016. Top line growth will be facilitated by secular demand growth for auto and aerospace applications and with additional investments and quality, efficiency and production capacity, we will continue to capitalize on these opportunities to deliver improved value added revenue and EBITDA.

We will now open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] We will take our first question from Andrew Quail with Goldman Sachs.

Andrew Quail

Thanks Jack, thanks for the update, and appreciate you're taking the question, couple of questions, one on the aero just, are you guys seeing a transition from some legacy to the new generation aircraft, is that coming through now?

Jack Hockema

I don't know that we're seeing that significantly at this point, that's little bit further down the road.

Andrew Quail

And that sort of obviously the strength in military, what sort of other trends that you guys are seeing?

Jack Hockema

You mean other than commercial aerospace, Andrew?

Andrew Quail

Yes, and obviously yes, outside of military because we know that strong.

Jack Hockema

Yes, well, the really the big opportunity here is the Joint Strike Fighter which is military. Beyond that, 15% of our aerospace and high strength approximately is industrial type applications and those have been reasonably strong although not high growth areas, but reasonably strong just like all of our general industrial has been here in the first half. Business jets and those areas, really we don't see much change of any consequence. The real drivers for us are commercial aerospace and military and then the industrial applications.

Andrew Quail

And just you've talked about obviously the auto extrusion, so do you think that delay will last into the end of -- do you think that weakness will be into end 2016 or what that sort of can you just sort of guidance into 2017 on that for the side or is it just a growth that pushed out?

Jack Hockema

No, it's really what I said in the remarks and I think our release said it as well. We really have two things are happening here. We have all programs rolling out which we had anticipated; however, one of those programs terminated rather abruptly when our customer discovered a lot more inventory in the pipeline than we knew they had and perhaps maybe they knew they had, but anyway terminated the program prematurely. So that reduced sales from our expectation on rolling off programs. And then on the other end, another major program, one of the major programs that we're ramping up on here, in the second half of the year or actually throughout this year has started a little later than we anticipated and is ramping up slower than we anticipated.

So it's really a matter of timing rather than any real demand impact. We still remain extremely confident that over the next several years, we’re going to see a 5% compound annual growth rate in our content for vehicle. And again, I think it’s important to put into context here, over the past two years we’ve had more than 70% sales growth in automotive extrusions. So from our standpoint, this frankly has not been a major upset to us as given our operation a chance to really assimilate all of this increased production that we have gone through the operations and is showing up in enhanced efficiency on our operations.

Operator

We will now hear from Edward Marshall with Sidoti & Company.

Edward Marshall

I wanted to kind of talk first about the Joint Strike Fighters, the first time I’ve heard you guys talk about probably haven't been listening to that in the past. What did you guys do as far as sales in ’15 from the JSF and what would you anticipate that might be in 2016?

Jack Hockema

We don’t break that out Ed, it’s a relatively small portion of our total aerospace and high strength sales at this point, it's never going to be a predominate portion of our aerospace and high strength sales, but it is a nice growth leg for us going forward. It’s really been going on for 5 or 6 years now, kind of orders trickling in, and we’ve had a major position on that from the very outset. But now, we’re really starting to see, and I think you saw it in the Lockheed announcement of their results. They're seeing strong orders come in. Their production is beginning to ramp up, so it’s affecting their results, and we’re beginning to see it in orders and anticipate a nice strong growth in that as we go forward.

Edward Marshall

So is it fair to think maybe 1% or 2% from a volume perspective?

Jack Hockema

I wouldn’t even quantify at this point.

Edward Marshall

You have to try. So let me talk about aerospace and I guess it’s been floated out there several times about, the event of the downturn and things of that nature, and I am looking back into the model and I look at pricing and volume, and they held up pretty well through the last cycle. I understand ‘09, ’10 not a normal cycle, and you’ve added plenty of capacity there. So I have two questions, one, what measures are put in place to keep pricing stable as we kind of if markets and volume start to kind of shift a little bit lower? And then two, assuming volume is lower, the capacity that you’re at it, what’s the detrimental margin in that business now versus where it was in the last term?

Jack Hockema

Let me start by saying that it’s highly speculative in our view as to whether the downturn is coming because we certainly do not expect a downturn. The backlog is at an all-time high, it’s 9.5 years, and you look at the last cycle, it was a 3-to 5-year backlog. And most of that backlog is really solid. We don’t think very much of it maybe 15% or 10% to 20% at most would go away in a severe global downturn. So we think the backlog is strong and the backlog supports the build rates and our customers we know they've been very public about it, they believe that as well. However, that said, we realized we're in cyclic businesses and a big part of our business model as we've been telling everyone for more than the decade here is we managed for the downturn. So it's something we discuss with our board every quarter.

So, first of all, we flex our cost very aggressively when we do have a downturn, and secondly, we build our contracts anticipating that. So, we have provisions in our contract to give us a little bit of safety net as well. So, really the primary risk is in the pricing area on the spot business, so if the industry begins to see significant overcapacity if we really get a downturn of consequence, we can begin to see some margin erosion around the edges on the spot business. But again a good place to look, I think people if you go back and look and we put 10 years worth of information in our investor presentation for a reason and that is it's a cyclic business. So, we encourage anyone who wants to study that to look at our 10-year trends and see how we performed through the last downturn, which was a pretty severe automotive and industrial downturn as well as a bit of an aerospace downturn. So, we think we've got a business model to manage that about as well or better than anyone in our industry. We don't expect it to happen, but we're ready for it.

Operator

Our next participant is Tony Rizzuto with Cowen and Company.

Tony Rizzuto

I've got a couple of questions, just a follow-up on the aero questioning a little bit, it's becoming increasingly clear that success is very dependent upon right programs as a no supply in, with so many changes in build rates going on right now with wide bodies and A-380 the 777 et cetera, and obviously higher build rates on the single aisle. What makes you confident that you are on the right platforms? And I know you've talked in the past Jack, about that sometimes it's difficult to know where your material is going, but what gives you the confidence that you're positioned in the right way?

Jack Hockema

Well, we're confident because our products when we sell a piece of plate, it could go onto any platform in the entire spectrum. There will be may be a Boeing spec and an Airbus spec that could be different, but if it's going to Boeing through that supply chain or through the Airbus supply chain, it basically is generic and applies to all of the airframes. There are exceptions to that in terms of our plate, but those exceptions are relatively rare. In extrusions, it's pretty much the same case although some extrusions, in extrusions we've a higher percentage that can be platform or application specific, but it still is relatively generic as well. So, we're not at all distressed by changes in mix or what planes they build, we just wanted to build planes that use aluminum.

Tony Rizzuto

Understood and that would apply even if you've described before, the A-380 is kind of a plate hog if you will with a monolithic plate and that would even apply with those build rates decelerating?

Jack Hockema

Sure. So, when they build fewer A-380s that takes a little bit of demand out of the mix, but there, while the A-380s a plate hog, they only build a handful of those every year, and then they're building more than what almost a 100 a month of single aisle between Airbus and Boeing a month. So, the big demand actually is coming from the single aisle and then the 787 and the A-350. And those programs and again in our investor presentation, we've got some charts to show the ramps up on the individual airframes, and you can see the A-380 and the 747 while they're declining the single aisle and the 787 and then 350 are really ramping up. And again come back to, it's a 9.5 year backlog. I mean the typical backlog is three to five years. There's a huge backlog there. We hear all this angst out there about aerospace and frankly, we're seeing here saying where in the world is this coming from, it makes no sense to use. We remain very confident, I mean we knock on wood, things can happen. But with everything we know right now, we feel really good about the aerospace business, and we feel really good about the automotive business.

Tony Rizzuto

And just if I could shift over to your adjusted EBITDA performance which was very solid operationally, and how should we think about the cadence in the back half of the year as you work through the major investments, and you've got obviously some significant maintenance expenses as well, so how should we think about that cadence going forward?

Jack Hockema

We try to estimate what we think the disruption will be with that maintenance and most of that is actual project expense. We think, we'll have a minimum of disruption here in the second half, most of these are furnace rebuilds which are pretty routine as in we've got rebuilds in I think four different plants, here in the third quarter. So, we get several different plans involved, and we rebuild furnaces all the time. So, we don't expect we're going to have major disruption there. The other thing that happens in the second half is typically we get a little bit of sweep in inefficiency during the summer months, the heavy vacation period and the high heat period. So there can be a little bit of impact there and the seasonal volume decline sometimes gives us a little bit of a blip. So, sometimes it's tougher to hold the efficiency in the second half, but frankly we think we're on a trajectory of performance unless we have some unanticipated hiccups here where we're going to continue to sustain or improve our efficiency even in the second half with some of the headwinds that we'll have.

Tony Rizzuto

That's a key point that you made about the trajectory and as we think about, you've commented in the past very consistently about you're kind of at higher highs you're talking about they're in the levels that you've talked about, you've talked about the adjusted EBITDA margin in the upper 20s, and I'm wondering it sounds to me that upper 20s is not 26.5% or 26.6%. But are you, it seems to me just reading everything you've talked about in the last couple of quarterly conference calls, it seems like you may be getting a little bit more confident in the longer term capabilities, is that a fair point?

Jack Hockema

No, we've been confident all along just that now we're starting to perform at a level that you all can see it. We've always known it was there. We've known that we were doing the right things to get it to come true, but as we're gaining in one place it's kind of like squeezing the balloon and we've popped out somewhere else like the automotive. That 70% growth gave us some pretty significant growing paints and masks some of the underlying improvements we're making over the past couple of years. So, we've known it was there and we can see it. It's just been a matter of delivering, and we're confident that there is more there. We're nowhere near our full potential as a business. I mean I characterize it internally here. We think we're doing pretty well, but we're like the best hockey players in Mexico, and we want to get to the NHL here in terms of our cost management.

Tony Rizzuto

So, we think that too, so maybe along with the script grader consistency as well as the continued improvements. And then one final question on auto and obviously the timing issues you referred to and Jack, you always talk about how mix is so extremely important within a lot of your high strength auto et cetera. So, can you give us an idea these disruptions that are occurring right now and may be the rate of adoption, maybe not so much the rate of adoption, but just a slow ramp that you're seeing with one customer and these other the issues? How is that affecting the mix and it sounds like it's more of a certainly a temporary thing and probably will be behind you as you may be enter into the fourth quarter of the year, but can you describe a mix a little bit and the duration a little bit more in a granular way?

Jack Hockema

Well, it depends on how you measure mix, but if you measure mix in terms of value added revenue that's the big driver thee is driveshaft tubing, which is a mature product, but it's strong with the heavy total build rates, but in particular the build rates of trucks and large vehicles. The driveshaft is strong now, so that's good for our mix. The growth in chassis and structures and in bumper type applications and those in terms of value add revenue per pound are leaner certainly then driveshaft tubing is, so the launches or the delays in the launches and the programs that are rolling off actually are enhancing our mix as driveshaft remains relatively stable or frankly has improved some year-over-year because of the higher build rates.

So, as we go forward, and I think we've said this on a few calls in the past, we expect we'll see degradation in that value added revenue per pound or the mix, if you will as we go forward because we're bringing in from a growth standpoint some lower value added products still attractive products. But in terms of value added revenue per pound, not comparable to driveshaft or we do a lot of work beyond just a raw extrusion, we draw it. We form it. We put parts inside it. So it's a much higher cost and price per pound than our other automotive products.

Tony Rizzuto

As I see your stock down, trading down 5% today, I just wanted to, what is, can you remind me what is your remaining share buyback authorization?

Jack Hockema

$115 million.

Operator

Our next question comes from Paul Luther with Bank of America.

Paul Luther

I wanted to shift gears away a little bit from commercial aerospace just for now, can we talk about contained metal cost you said I think it was another tailwind again in Q2? And I saw that in your commentary you said it could continue to be a tailwind here in the second half, I was just wondering if you can give us a sense of magnitude and then how we think about that against aluminum LME prices that have started to come up through the year?

Jack Hockema

Yes, good question. In terms of the contained metal, it's really difficult to quantify how much is contained metal. It certainly is a benefit, but in terms of a raw dollar number, it can't give you a raw dollar number. The way we look at it, well, let me speak to the last part of your question here. We did see metal prices gravitating up, but today I think the firm at Midwest was $0.78 or $0.79 a pound, so it's come back down from $0.82 or $0.83 and where it is typically being most of this year in the high 70s, just barely below 80s, and the average has come down to the mid 70s. But most of the time, it's been about where it is right now. So, we're not convinced that there is going to be a move; and if there is, we think we're relatively well protected for any moves that would happen here in the second half of the year.

In terms of the quantifying what might the risk be is really a function of two variables here, the first variable is how steeply does that go up where the market doesn't have time to adjust to it if it really ramps up really rapidly, and the second part is, what is competitor behavior because we know what Kaiser's behavior will be and that is, we'll go through to past that cost through when it goes up, if it becomes a significant increase. But that will be a function of how our competitors behave and that will mostly be a function of what's the capacity utilization look like in the industry who has slacked capacity, and how much of they just try to buy business if we get a run up in metal prices. So, it's really difficult to say over the long-term, we think these things tend to stabilize overtime unless you get major moves one direction or the other.

Paul Luther

And then, can we talk a little bit about M&A and your thoughts and strategy there, I think you've been -- you guys have been looking around for assets for sale, you obviously have a solid and strong balance sheet, can you talk a bit more about your strategy where you may look for there, would you be looking to maybe enhance your positions in serving aero and auto your key end markets or would you look to diversify beyond those markets, anything you can help us with there?

Jack Hockema

Well, it depends, it starts and we'll just whatever strategic retreat with our Board here coming up in September, and we do this in every meeting, but we really do it in depth in September to analyze where we go. And I'm sure, we'll conclude this September as we have the past several Septembers that we've a really solid business model here, and we have really solid markets with good, strong secular growth trends. So, as a consequence we're in the position that we don't have to do something, and so we start with if we're going to do something in terms of inorganic growth don't screw it up. It has to be something that's complementary to this core business that we have. So, where do we go from there? Would we do something that beats up our existing positions or fills white spaces or we diversify into other applications? We would do any of those, if it's clear to us that we can digest it and that it really creates long term shareholder value. So, we're very discriminating in what we look at, but we'll look at that whole venue of opportunities looking for the right thing and if the right thing doesn't come along we'll keep running this business model and buy what is a very attractive acquisition which is Kaiser Aluminum.

Operator

We will now hear from Evan Kurtz with Morgan Stanley.

Piyush Sood

Hi guys, this is Piyush Sood filling in Evan Kurtz. I had a couple of quick questions, first going back to the $5 million to $6 million extra maintenance guidance, can you give us some sense around how much maintenance you had in the second half of last year or maybe how much you've incurred in first half of this year?

Jack Hockema

I think this is, I'm going to talk slowly until I get a nod here, but I think this is pretty close to what we had last -- the second half is about the same as last year. And the first half was roughly the same as the first half last year. The full year this year total major maintenance spending is about the same year-over-year and the mix first half to second half is similar.

Piyush Sood

And on general engineering plate imports impacting the second half, should we expect an impact only on value add revenue or is this going to be some impact on the volumes also?

Jack Hockema

You're turning to seasonality.

Piyush Sood

Seasonality as well as --

Jack Hockema

I am sorry, import pressure. The import pressure is on price. So we have our position, we'll maintain our position with customers. We will maintain a significant premium over the imports, but the import prices are coming down, and we get as much premium as we can. But if they go down then we have to move down slightly. So, it's really only on the price we won't lose business because of this.

Operator

Our next participant is Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs

I had a question generally speaking on aerospace, and I know there is probably a few puts and takes from Farnborough and we've got a long backlog as you've noted. Has there been any change one way or the other versus your three year outlook of 5% compounded annual value added sales growth for the next three years in the business?

Jack Hockema

I will give a cautionary note to that. We're in the process right now of updating all of our projections as we go forward and this is a pretty laborious process. We've got a huge model that we use that builds it from bottom up airframe by airframe, how many are they going to build and what's the content in each platform. So, we're in the process of doing that, but at a high level I don't think there is any change of consequence, it maybe around the edges. But they will be basically the same I think.

Phil Gibbs

Okay. Yes, I just had that -- I was just thinking about the fact that you had some 777 markdowns through immediate centers, so I know that those are pretty heavy plate consumers. But we'll wait on that from you guys. The $2 million impact compared to the first half run rate, Jack, for the pricing impact for engineering is that 2 million a quarter or is that 1 million a quarter?

Jack Hockema

No, that's 2 million in total and frankly more that will be in the fourth quarter then the third quarter.

Phil Gibbs

Okay. That's helpful. And you now have lots of cash, lots of liquidity after the recent market offering, a lot for a company of your size, what do you do with it here and save it for a rainy day, you give it back to shareholders, you have something on your radar screen right now. I am sure it's question that well you shouldn't be getting at this point?

Dan Rinkenberger

Sure. This is probably the same answer that we have even before this because we had relatively large amount of cash on our balance sheet. We took advantage to upsize because it was a great market opportunity at the interest rate that we saw, and we don't go to market every six months, we go to market every couple of years and more often. So it's a chance us to increase at a good rate. The users are basically the same. We will be available, have the cash available if there isn't M&A opportunities that comes along. But if it doesn't then we are prepared to make some additional share repurchases overtime as we have for the last two years at the right price assuming the right kind of structured program.

Phil Gibbs

Dan, have you any update on the NOL position broadly in terms of its -- if you are to kind of continue at this pace how many years left do we have for the NOL, and I know you also have or had a vote coming up on something around that issue in terms of the charter, anything you should provide us there going else of important cash flow piece with this?

Dan Rinkenberger

Sure, we have protections that we had expiring in our charter that were there to protect the NOLs. Those will replace with alternative or replacement provisions in the charter. We also had a tax rights plan that was implemented; both of those were approved in May with our shareholder meeting. So, all those last for three years until 2019 which is a ballpark for at least a timeframe during which we think we're going to continue to be using the NOLs. And that they could expire -- those programs could expire, we consume the NOLs earlier. The other side just said that we have several years we have to go on NOL usage at the pace that we've seen.

Phil Gibbs

The 2019, 2020 is sort of one year you're ball parking those, that's been run out --

Dan Rinkenberger

No, I mean that's all depend on what our pretax income ends up being over the next several years and so we hope it runs up sooner than later.

Operator

We will now hear from Jorge Beristain with Deutsche Bank.

Jorge Beristain

Just maybe for Dan, a quick technical question on your CapEx spend through the guidance of the nine months, I think you'll be running close to 69 million, and your full year guidance you just reiterated at 80, so should we expect that 4Q will be just a very light CapEx quarter?

Dan Rinkenberger

I think we have continued some talks about what the CapEx forecast was because the only thing we've said is approximately 80 for the full year and 42 actual. If you were believing and they're saying something about our capital spending when we saw about the higher maintenance expenditure that is all expense to the $5 million to $6 million increase in major maintenance as an expense item, not a capital item.

Jorge Beristain

Okay, maybe we misunderstood that. And then in terms of CapEx just if you could just talk about what inning you guys are in, I mean obviously the benefits from the Trentwood Phase 5 are going to start next year, but I'm just trying to understand as you're applying more of this money into the business, what is the expected payback on the CapEx? And where do you expect it to be reflected, my understand would be in better margins because it is becoming more efficient and therefore lowering costs, it's not something that’s really going to drive up your bar, so I just want to understand kind of what inning you guys view that the benefits of this CapEx are coming back to you, and secondly the payback on the Trentwood plant?

Jack Hockema

Let me take this in steps. So, in 2017, we'll continue to get benefits from the tail of the investments that we already put in the Phase 5, Phase 5 investment and the new casting complex. We're still continuing to reap the benefits this year and expect to continue to reap benefits next year from Phase 5 and the casting complex. The next major investment the first tranche of that really starts to impact our results in 2018. And certainly, the driver is cost although in the first tranche, we'll also get capacity. So, if the markets go where we think the markets go and with our position in the marketplace, we frankly think we will utilize some of that incremental capacity as well, so we'll get leverage benefits on margin as well as cost benefits as well as some increased shipments. And in terms of the return, we expect very attractive returns compared to our cost of capital on this $150 million program that we've announced.

Jorge Beristain

Kind of press you on that a little bit are you talking 3, 4 year paybacks or any kind of return on capital hurdle that you have?

Jack Hockema

We're talking well above our cost to capital in terms of returns.

Operator

Our next question comes from Curt Woodworth with Credit Suisse.

Curt Woodworth

Thank you. Hey, Jack, I think one of the issues facing a lot of sort downstream investors right now outside of just the build rate half for aero, is the issue with contract renewals for OEM, and it seems like the OEMs in aero trying to put a lot more downward pressure, take more value through the chain. So can you just kind of update us on where you stand with your Boeing and Airbus contracts and how you are approaching that going forward?

Jack Hockema

Yes, we don't like to talk about commercial arrangements with individual customers. Let me just say that we're well positioned in terms of our contracts with our customers and we're very confident about our position with our customers from both a pricing and a volume standpoint as we look at the next several years going forward. So, in terms of any angst or risks that you build into the model, there should be none of that as it relates to Kaiser.

Curt Woodworth

Okay. And is the Airbus contract for you guys up for renewal this year or next year I believe?

Jack Hockema

There are discussions with some of our major customers on contracts, yes.

Curt Woodworth

Okay. And then, in terms of the future for Trentwood kind of outside of the 5% to 10% creep you're getting with the modernization project. At some point, we think that [hot mill] capacity in the United States could get fairly constrained. Would you sort of contemplate a bigger expansion at Trentwood and hypothetically if someone approached you to provide substrate into body and weight finishing line, is that something that you guys would entertain?

Jack Hockema

The issue with doing, the answer would be is yes, but the second question, whether that's feasible or not is probably no because we're located way up in that corner in the Pacific Northwest. So we're so far away from the markets that it creates somewhat of a disadvantage in terms of supplying substrate. So, is it technically feasible? Yes. Is it practical or likely to happen? We would say no at Trentwood, that doesn't rule out us doing something somewhere else in the country using our expertise and working with the partner, and we've explored those kinds of things in the past as well.

Curt Woodworth

And then just last question on aero for the 25% of your volumes that goes through more spot or servicing the channels, are you seeing any price weakness there or any pushback in the supply chain?

Jack Hockema

You're talking the spot business on aerospace to high strength.

Curt Woodworth

Aero high strength, yes.

Jack Hockema

Not as significant as what we've seen on general engineering, pricing has actually been pretty stable in those alloys and products that we supply that we characterize as high strength alloys.

Operator

We will now hear from Phil Gibbs with KeyBanc Capital Markets.

Phil Gibbs

Jack, just had a quick one and then I hop off here, but your mix in aerospace in high strength between plate long, I know, was a sort of a mix bounce back in longs in Q1, and pricing in Q2 was still very strong, I think it was even higher than Q1 despite your expectations for the mix to retain itself. What are we thinking on in terms of 1.5 million from the momentum perspective?

Jack Hockema

In this, if you compare the first quarter to the second quarter, first quarter had unusually high plate in the mix and that was an anomaly based on what you get into the accounting gymnastics or revenue recognition, what get's recognized at the end of the year, and what get's pushed into the first quarter. So there was some really fourth quarter production where the revenue got pushed and the shipments recognition got pushed into the first quarter. And then in the second quarter, we had a little bit of the opposite where we've built up in the aerospace and high strength plate. We've built up some pent up demand, if you will that'll began to show in the second half. So, it's kind of an anomaly if you try to look at the first quarter and the second quarter, plate was unusually strong in the first quarter, not, and we pulled some out of the second quarter into the first quarter is pulling from fourth quarter.

And now, the second quarter is the opposite phenomena. So, plate was high first quarter relatively low at the second quarter. We think it's going to be strong in the second half of the year. It's back more to look -- you need to look at it in six month bucket, so just too many things that happen quarter-to-quarter. And frankly, I don't pay much attention to quarterly results. I look at six month buckets, and that's why we've shown in a lot of my churn. I show six month buckets so it's just too much noise between 90 day periods, everything is slashing around in there, cost and sales.

Phillip Gibbs

So, fair to say that Q2 was the strongest quarter in four years in terms of more along versus 12 and also at the middle of contained metal cost doesn't move in itself in past. We have one plate that only of a less [indiscernible] tailwind from the cost and we should expect some of the average price in Q1 to moderate that in relatively Q2?

Jack Hockema

Phil, I don't know if you're on a cell phone or something, but you completely broke up there. We couldn’t hear.

Phillip Gibbs

Am I here?

Jack Hockema

We hear you now.

Phillip Gibbs

Alright, perfect, no, so, I said fair to say from that comment that the mix was very rich in aerospace in the second quarter in terms of having long, you also had some lower contained metal cost, so moving into the second half we have more plate, we probably have lost benefit from the contained metal costs so we should anticipate pricing being somewhat lower than it was Q2?

Jack Hockema

I'd say, the price will be lower in the second half than Q2, but not necessarily because of the real price, the contained metal I don’t think was that much in the second quarter versus the first quarter. It was really a function of mix where we had a long products favorable mix in the second quarter and there will be less long product as a percentage of the mix in the second half.

Operator

That concludes today's question and answer session. Mr. Hockema, at this time, I will turn the conference back to you for any additional or closing remarks.

Jack Hockema

Okay. Thanks. Well, we had a record first half and we're on pace for a really strong full year of 2016, and we're very bullish about secular growth in our downstream markets and how well we're positioned. So, we thank you for joining us on the call today and look forward to updating you again with our third quarter results in October. Thank you.

Operator

That concludes today’s conference. Thank you for your participation. You may now disconnect.