Aug 24, 2008
Executives
Melinda Ellsworth – VP and Treasurer Jack Hockema – Chairman, President, and CEO Dan Rinkenberger – SVP and CFO
Analysts
Timna Tanners – UBS Tony Rizzuto – Dahlman Rose & Company Tim Hayes – Davenport Company Seaver Wang – Utendahl Capital Dan Whalen – Dahlman Rose Brett Levy – Jefferies & Company Matt Teplitz – Quaker Capital Management
Operator
Good day. And welcome, everyone, to the Kaiser Aluminum’s second quarter 2008 earnings results conference call.
Today’s call is being recorded. At this time, for opening remarks and introduction, I would like to turn the call over to Melinda Ellsworth, Vice President and Treasurer.
Please go ahead.
Melinda Ellsworth
Good afternoon, everyone. And welcome to Kaiser Aluminum’s second quarter 2008 earnings conference call.
If you have not seen a copy of today’s earnings release, please visit the Investor Relations page on our Web site at kaiseraluminum.com. We’ve also posted a PDF version of the slide presentation for this call.
Joining me today, our Chairman, President, and Chief Executive Officer, Jack Hockema; Senior Vice President and Chief Financial Officer, Dan Rinkenberger; and, Chief Accounting Officer, Neal West. Before we begin, I’d like to remind the audience that the information contained in this presentation includes statements based on management’s current expectations, estimates, and projections that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Such statements include statements regarding the company’s anticipated financial and operating performance related to future events and expectations, and involve known and unknown risks and uncertainties. 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 for the quarter end June 30, 2008, and reports filed with the Securities and Exchange Commission.
All information in this presentation is as of the date of the presentation. 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.
Non-run rate items to us are items that, while they may recur from period to period, are particularly material to results, impact costs as a result of external market factors, and may not recur in future periods the same level of underlying performance were to occur. These are certainly part of our business and operating environment, but are worthy of being highlighted for the benefit of the users of our financial statements.
Management’s intent is to neutralize the fabricated product segment from fluctuations in underlying metal prices. We characterize metal profits and LIFO charges as non-run rate items that eventually offset to a great extent over the course of a full year.
Further presentations, including such terms as net income or operating income before non-run rate, are not intended to be and should not be relied on in lieu of the comparable caption under generally accepted accounting principles to which it is reconciled. Such presentations are solely intended to provide greater clarity of the impact of certain material items on the GAAP measure and are not intended to imply such items should be excluded.
At the conclusion of the company’s presentation, we will allow for questions and answers. I would now like to turn the meeting over to Jack Hockema who will provide overall commentary on Kaiser Aluminum, Jack.
Jack Hockema
Thanks, Melinda. As Melinda mentioned, you may follow our discussion by viewing the slide presentation on our Web site at kaiseraluminum.com.
My remarks begin with headline items on slide five in the presentation. Year-to-date heat treat shipments – heat treat plate shipments were a new record, supported by strong demand for aerospace and defense applications, and the outlook for commercial aircraft build is very positive, which bodes well for long term heat treat plate demand.
Fabricated products first half results were negatively impacted by a margin squeeze, primarily from energy related cost pressures. We have implemented a price surcharge that will soften the future impact of volatile energy cost.
Our investment program continues on schedule. And we have significant financial capacity to fund additional growth initiatives.
Slide six provides an overview of the first half results for fabricated products. Second quarter and year-to-date heat treat plate shipments set new records, although throughput was inhibited by the planned furnace outage for the phase three expansion by production delays due to various bottleneck operations and by heavy gauge plate qualifications.
The year-to-date results in fabricated products reflect a margin squeeze from higher energy related costs as well as unfavorable Canadian currency, higher cost, and the inefficient rod and bar value stream, and higher depreciation, and planned major project expenses. The energy price surcharge will address future volatility and energy costs.
And the Kalamazoo project will resolve inefficiencies in the rod and bar value stream. Turning to slide seven and the Trentwood expansion, we are encouraged by the success on customer qualifications for heavy gauge plate.
While the qualification process has proven to be more challenging than we expected, the difficulty reconfirms the barriers that new suppliers must clear to qualify for these very demanding applications. Construction for phase three of the Trentwood expansion began in June, and is scheduled to be completed by mid October.
In addition to converting one heat treat furnace from batch to continuous operation, the project will also address other bottleneck operations in Trentwood’s heat treat plate flow. We expect to be fully operational at the projected 2009 throughput rate by the end of the year.
Slide eight illustrates the directional EBITDA impact of the heat treat plate expansion using 2006 EBITDA as the benchmark. The key variables in the chart are heat treat plate capacity utilization and price mix.
The X-axis displays a range of capacity utilizations to illustrate sensitivity to volume changes. And the Y-axis represents the incremental EBITDA compared to the 2006 benchmark.
The lines on the chart display actual conditions experienced in both 2005 and 2007 to illustrate sensitivity to price and mix changes. While capacity utilization and price mix are key variables, the footnote’s comment on additional consideration that may impact incremental EBITDA from heat treat plate.
Slide nine summarizes other major investment projects focused on the efficiency, Kaiser Select quality and capacity. The largest project is the new Kalamazoo plant addressing inefficiencies in our rod and bar value stream.
Kalamazoo is expected to begin production in late 2009, and to be fully operational during the first half of 2010. Dan Rinkenberger will now provide details regarding the financial results.
Dan Rinkenberger
Thanks, Jack. Turning to slide 11, our net sales on a consolidated basis for the first half of 2008 totaled $813 million, but was 5% higher than the first half of 2007.
Fabricated products shipments were 8% higher than the first half of 2007 on strong shipments of aerospace, defense, and general engineering applications, including record plate shipments. This was partially offset by lower primary aluminum shipments and lower realized fabricated products pricing.
Net income is highlighted on slide 12. Net income was $62 million for the first half of 2008, included approximately $24 million of pretax non-run rate items, primarily related to mark-to-market gains on metal hedging positions.
Earnings per share came to $3.04 fully diluted, of which, approximately, $0.97 per share was attributable to these non-run rate items. Net income included an effective tax rate of 42% for the six-month period, the majority of which was non-cash.
Operating income results are highlighted on slide 13. Year-to-date 2008 operating income of $106 million includes the $34 million of non-run rate items that I mentioned previously.
For the six-month of 2008, operating income before non-run rate items declined by $8 million to $72 million, reflecting cost pressures that offset the strong value added sales in fabricated products and lower volume as well as cost pressures in primary aluminum. Reeling our fabricated products segment on slide 14, our segment operating income before non-run rate items was $82 million in the first six months of 2008, down $5 million from the record level posted in 2007.
Fabricated products shipments were up 8% overall. And heat treat plate shipments set new records in the first half of 2008, with plate shipments up 5% over the six-month period versus the same period in 2007.
The net favorable operating income impact have increased sales worth $13 million, but this was more than offset by higher energy; freights and currency costs; higher manufacturing costs largely related to our rod and bar value stream, which our Kalamazoo investment will address; and, higher planned major maintenance and depreciation expense related to commissioning new production assets. Non-run rate items were also approximately $1 million worse than the prior year.
Our reported primary aluminum operating income is presented on slide 15, was worth $49 million in the first six months of 2008. This included approximately $33 million of non-run rate items, primarily unrealized gains on the metal hedging positions.
Operating income before non-run rate items of $15 million for the six-month period was $4 million lower than the prior year due to lower volume from the outage at Anglesey after the fire in June, higher power costs, unfavorable currency exchange rates, and higher ocean freight costs. However, aluminum pricing was $9 million favorable as compared to the prior year.
Turning to slide 16 and the situation at Anglesey, on June 12th, the production rate was reduced to approximately one third of the total rated capacity as a consequence of the failure in a power transformer and subsequent fire. The first potline was restored to full production in late July.
And Anglesey expects to restart the second potline later this month, and be fully operational by the end of November. We believe the unfavorable impact could range from $25 million to $30 million in the second half of 2008.
That’s Kaiser’s share depending on the restart timing and other factors. Anglesey’s insurance is expected to cover financial losses of Anglesey and its owners, although, the timing of the insurance recovery is still uncertain.
Regarding the long term operation of this smelter, Anglesey continues to pursue affordable power beyond the September 2009 expiration of the current power agreement. On slide 17, we showed the corporate expenses that are not allocated to the operating segments.
Cash corporate expenses before non-run rate in the first half of 2008 improved by $2 million as compared to the first half of 2007. On slide 18, we highlight our financial strengths to fund our growth initiatives as well as cash returns to shareholders.
At June 30th, we had $27 million of cash, which was lower than March 31st as we funded a planned increase in inventories to let us continue to serve our customers through production outages at several of our plants, the heavy equipment upgrade scheduled in the third quarter. We had no debt and over $150 million of borrowing availability on our revolving credit facility.
Our operating cash flow remains healthy. And we benefit from sizeable tax attributes.
With the following financial position to fund growth initiatives, in June, our Board declared a dividend of $0.24 per share, which was a 33% increase over prior quarters, and also approved the $75 million stock repurchase program. And next, I’ll ask Jack to provide some concluding comments.
Jack Hockema
Thanks, Dan. Slide 20 addresses the market environment for our fabricated products business.
Demand for aerospace plate is robust and is growing. The recently updated airline monitor forecast anticipates record commercial aircraft production this year and next year.
Also notable is that the outlook anticipates no downturn at any time through the entire next decade. Industry supply for heat treat plate has grown to a level that supports these build rates.
And we do not anticipate a heat treat plate supply shortage as we move forward. This condition may create future pressure on spot prices.
Soft ground transportation demand continues with very weak truck and trailer builds and declining domestic auto builds. Restocking of rod and bar continues per service centers, and has created strong demand on the mills for rod and bar products.
Slide 21 summarizes Kaiser’s near term outlook for fabricated products. Phase three of the Trentwood expansion is scheduled to be completed in mid October.
Our current outlook is for third quarter heat treat plate production to be down slightly from the first half pace and to ramp up to the full phase three capacity during the fourth quarter. Overall demand remains strong.
And we anticipate a relatively modest third quarter seasonal impact with fabricated product shipments down a few percentage points from the first half run rate. We have implemented a price surcharge to soften the impact of volatile energy costs.
And we are encouraged by acceptance of the surcharge in the marketplace. The benefit would be relatively small in the third quarter, but we anticipate that the surcharge could mitigate up to 70% of incremental energy costs by the end of the year.
Significant planned project work is under way. And we anticipate the third quarter major maintenance and project expense will be approximately $6 million higher than the first half run rate.
While management’s time and attention will be concentrated on execution of these projects, we are well prepared to support our customers while we upgrade our operations. Slide 22 recaps today’s report.
Business conditions remain strong, especially for aerospace applications. And the company’s long term outlook is very positive.
Volatile energy costs are squeezing margins, but our price surcharge should begin to soften the impact later this year. The investment program is on track, with phase three of the heat treat plate expansion and several other improvement projects scheduled for implementation during the third and fourth quarters.
Our strong financial condition provides us with a capability to fund additional investments. And we continue to explore new opportunities for profitable growth.
We will now accept questions.
Operator
Thank you. (Operator instructions) We’ll pause for a moment to give everyone an opportunity to signal.
We’ll go first to Timna Tanners of UBS.
Timna Tanners – UBS
Hi. How are you all doing?
Jack Hockema
Good, Timna.
Dan Rinkenberger
Good, Timna.
Timna Tanners – UBS
I apologize in advance because I know that you have a lot of detail in your slides. And I’m sure there’s more in the queue, but a few things that I missed and I know they’re probably in there.
Can you talk to us about your cash tax rate and how many shares you might have bought back in the quarter?
Dan Rinkenberger
Sure. Cash tax rate, I think that’s going to be, basically, the same as zip code as where we had been before.
The cash tax isn’t primarily the foreign tax and as well as the little bit of US state taxes or AMT. It’s not going to be much different than where we’ve been before.
And it’s probably single-digit percentages.
Timna Tanners – UBS
Okay. I thought maybe with the less Anglesey it might be a little lower, but maybe 10% or a little lower than that.
Dan Rinkenberger
Well, I see your point. So the effective tax rate of 42% is lower.
That’s really because of lower statutory taxes this year in both the UK and Canadian jurisdictions.
Timna Tanners – UBS
Okay. All right.
Then did you buyback shares in the second quarter?
Dan Rinkenberger
We really don’t want to comment, and won’t comment on the program. In the second quarter, I guess, the fair point is – I mean to answer your question, we haven’t because we didn’t launch it, and wouldn’t launch it until the first part of July as the minimum.
Timna Tanners – UBS
Okay. You don’t want to talk about the criteria that you’re thinking for buying back shares.
Dan Rinkenberger
We actually, are just going to be looking at that in context of all the rest of the cash applications that we may have and the requirements.
Timna Tanners – UBS
Okay. SG&A went up a bit for the quarter.
Can you talk to us about how you’re seeing that progress?
Dan Rinkenberger
Well, SG&A, when you say went up for the quarter, you’re probably looking at consolidated SG&A.
Timna Tanners – UBS
Okay.
Dan Rinkenberger
That’s the combination of both the SG&A that we talked about in the corporate segments on slide, probably, 17, as well as G&As that’s within the business unit for fabricated products. Fabricated products, we have shown some increase there as we’re going to business.
And we’re probably – that’s not going to be unexpected. Within corporate, especially if you look at the cash G&A, that’s a decline on the first half.
Timna Tanners – UBS
Okay. Great.
And then just a few more, on the energy surcharge, can you give us a little more color on what percent of the business that might be applied? I know Jack talked about how it’s not going to have as much of an immediate impact.
But how is it going to progress over time? Can you explain that a little bit further, please.
Jack Hockema
Yes, Timna. As I said in my remarks, I know we covered a lot in the slides.
But we think we’ll be up around a 70% pace by the end of the year. And then that will continue to grow in the future as contracts rollover and we get it implemented on new contracts.
Timna Tanners – UBS
Okay. So conceptually, it’s going to be applied right away to your spot tons.
And then it’s going to be progressively applied as contracts that are renewed.
Jack Hockema
Well, that’s correct, with the caveat that it will roll in during the third quarter. It did not apply until orders were entered on July 1.
So orders that had already been entered prior to July 1 do not receive the surcharge. So the impact on the third quarter will be, I’d say, maybe a third of the shipments at best.
But we think it will be up to – in the 70% range as we roll into the fourth quarter.
Timna Tanners – UBS
Okay. That’s helpful.
And the last question I have is on the heat treat. You made a comment that I want to ask you about a little bit more, about you don’t see any supply shortages and that’s something to watch.
How far are you sold out on or committed on your plate supply at Trentwood? And what’s the – are we worried about oversupply any time soon?
What are you thinking on the supply versus the demand on heat treat?
Jack Hockema
Our order book is very solid through the third quarter. And we anticipate that we’re going to run at a very high capacity utilization, certainly, in the fourth quarter and into the early part of next year.
However, we’re beginning to hear rumblings from the marketplace that competitors are out there taking actions that we’ve not seen in the past three or four years. And so, that relates to my comment that we’re beginning to see – it may have an impact on spot prices as we go forward.
And that could show up as soon as the fourth quarter. We’re still booking some of our spot business for the fourth quarter.
Timna Tanners – UBS
But taking actions to discount their product or taking actions to add extra capacity?
Jack Hockema
No. We’re hearing competitive pricing actions, spot comments about competitive pricing actions in the marketplace.
Timna Tanners – UBS
And you’d said in the past that you are capacity committed on Trentwood through 2011 or so. That’s what I was referring to.
Did that change?
Jack Hockema
Yes. No.
Let me make sure the comment’s clear for everyone who’s listening. I know you understand this.
But our comment has been that our capacity is committed to customers. And the entire phase two was committed when we brought on phase three.
We said roughly 50% of phase three. So if you do the Math and we’ve converted our bar charge now rather than times of the baseline, we’re showing percent of the ultimate capacity.
Roughly 95% of the ultimate capacity is committed to customers. That doesn’t mean that the customers will take their full allocations of capacity.
And we know, for example, that some customers who’ve already identified their take for next year will not take their full allocation.
Timna Tanners – UBS
Okay. And some of that’s going to the M Wrap [ph] market still or is that still solid?
Jack Hockema
Yes. The armor plate business continues to have legs to it.
And we think this year will probably be a peak year for demand. But we still see strong demand for armor plate for at least the next couple of years, and with a good tail of demand running for several years on armor plate.
So we still expect the demand is going to be solid going forward. I mean aerospace demand is going to continue to grow here.
And the airline monitor forecast is especially encouraging to us. It happens to represent our view.
But it’s nice to see a third party introduce the same concept that we see, which is good, steady demand through the next decade. And then we’ve got armor plate, and general engineering demand continues to be strong.
So demand is very strong. The only change that we see in market dynamics is it appears that industry capacity has now caught up to the demand, and where we’ve been in an undersupply situation for four years now.
We don’t think we’ll be in that undersupply situation going forward.
Timna Tanners – UBS
Okay. Thank you very much.
Operator
Our next question is from Tony Rizzuto, Dahlman Rose & Company.
Tony Rizzuto – Dahlman Rose & Company
Thank you very much. I’ve got a couple of questions here.
First, is a comment, though, on the share buyback program, am I understanding that you were basically precluded for a two-year period from the IPO. Was that correct?
In other words, your authorization was there. But were you really precluded from the dividend and buying back stock for a two-year period from an IPO point, was that – is that basically correct?
Jack Hockema
Well, Tony, I don’t think it was related to the IPO. I believe what you’re referring to is it was related to preserving the NOLs.
So the two years, if we had done anything in terms of repurchasing shares, it could have triggered a change in control. We would have lost all of the NOLs.
But now, as of July 6th, our order with the two-year anniversary was of our emergence from bankruptcy. At that point, now, if there’s a change of control, the amount of NOLs that we used could be capped on an annual basis.
But we would not loose the NOL, so. Therefore, the penalty for a change of control has been virtually eliminated here.
Tony Rizzuto – Dahlman Rose & Company
Understood. And in the past, you’ve talked about, on the heat treat side, on the plate side, a level that you felt was achievable for the full year of about 15%.
Do you still think that’s attainable based on comments that you just made earlier?
Jack Hockema
It’s 15% compared to prior year?
Tony Rizzuto – Dahlman Rose & Company
Yes.
Jack Hockema
I think that’s right. But let me just say that our outlook has not changed.
And we’ve got numbers on – in the slide deck here that show, in terms of next year’s capacity, we’re expecting to be roughly the same in the third quarter as we did in the first half. And then close to 95% on next year’s capacity in the fourth quarter.
And that still adds up to that same level as we’ve been forecasting all year long.
Tony Rizzuto – Dahlman Rose & Company
Okay. So I just want to make sure I – this is clear in my head.
So you still believe that the 15% growth year-on-year in heat treat shipments is attainable for 2008?
Jack Hockema
I don’t know if the 15% works. But all I can say is we’ll have to do that Math.
But our forecast remains the same.
Tony Rizzuto – Dahlman Rose & Company
All right. Let me just pursue the issue about some of the tonnage, obviously, and some of the take-or-pay, and the min/max is, and all that kind of stuff, but when you look at the defense market, what kind of changes, if any, do you anticipate if there’s a change in the administration with the Democratic administration?
How does that change your view?
Jack Hockema
Our view is that the demand will remain regardless of the administration. I mean the Military, regardless of which party is in power, they’ll want to be able to move the troops and protect the troops.
And there’s been tremendous deterioration of equipment in the harsh environment, not only the combat environment, but also just the harsh conditions in Iraq. So there’s tremendous pumped up demand just to replace vehicles for the next action for the Military, wherever that maybe.
So we believe that there’s going to be good, strong demand for – from the armor plate segment, as I said, for the next couple of years, and then with a pretty nice tail running out for a few years beyond that.
Tony Rizzuto – Dahlman Rose & Company
Do you see that demand from defense actually accelerating from this point or –?
Jack Hockema
Not in the armor plate. We think this year was probably the peak for armor plate.
It was really, really strong. But the next two years, we think will be very strong as well, just not quite as strong as what it’s been this past year.
Tony Rizzuto – Dahlman Rose & Company
So does that mean an actual decline in that overall market?
Jack Hockema
It means a decline in armor plate per se, but not in total heat treat plate. If you put together aerospace and general engineering, and armor, and all the applications, we think we’ll continue to see strong and growing demand.
Tony Rizzuto – Dahlman Rose & Company
Okay. And I have a question also on your slide 14, on the fabricated products.
You indicated the unfavorable impact of $10 million. I wonder if you could – you’ve attributed that to energy, freight, and currency.
I wonder if you can give us a percentage breakdown of each. And if we could just pursue that a little bit further.
Dan Rinkenberger
Sure. The energy was $6 million of that $10 million.
And the freight was approximately $2 million. And the currency was also about $2 million.
Tony Rizzuto – Dahlman Rose & Company
All right.
Dan Rinkenberger
And the next, we also do have – that’s also broken out. The whole level of detail is broken out in greater detail in our 10-Q and our D&A.
Tony Rizzuto – Dahlman Rose & Company
All right. Then I didn’t have a chance to go through that.
I appreciate that. What was the sequential impact on energy?
Dan Rinkenberger
Sequential quarter-over-quarter, I don’t have that handy –
Jack Hockema
I actually think it was relatively even quarter-to-quarter.
Tony Rizzuto – Dahlman Rose & Company
Okay. I just want to –
Jack Hockema
In terms of how it hit us from an expense standpoint, you get anomalies in how this all gets accounted for. But the bottom line, it was roughly the same at both quarters.
Dan Rinkenberger
Yes. Actually, the energy – and these are comparing it to prior year periods.
NRET in the second quarter was $4 million for full year as compared to last year. The half year was $6 million as compared to last year, so.
You got a sense. But again, those are references to prior year, not sequential.
Tony Rizzuto – Dahlman Rose & Company
Okay. And my next question is regarding the energy surcharge, are you getting any resistance right now from the customers you’ve gone to?
Jack Hockema
Well, as you would expect, there was considerable resistance in the beginning. And I might just add here, I did a little bit of research this morning because this isn’t the first time.
I’ve been responsible for the fab products business since the fall of 1996. And we’ve had four of these.
There was one in 2000. There was another one in 2003.
There was another one in 2005. And now we have this one up in energy prices.
And we made moves in each one of those environments to try to pass through an energy surcharge, and we’re unsuccessful. The industry just wouldn’t mobilize around it.
And that’s part of the reason that, for the first time, we announced the price increase where the press release that had my name in it and had quotes for me to send a very strong message to our customers that these costs were costs that we had to recover. And so, we’ve had a stiff upper lip on this through July and August.
And there were some competitors who didn’t immediately follow as well as us getting a lot of resistance from the marketplace. But we’ve maintained a strong posture here.
And it sold hard to our customers. And that resistance – and part of it, I think, is the function of what’s going on in the entire economy.
All the publicity on gasoline prices, on oil prices, there’s a general tone of inflation in the environment everywhere in the country. And I think that’s helped us this time to really persuade customers that this is an issue that had to be addressed.
And at this point, after some weakness in terms of being able to get it through in July, we see a lot better acceptance here in August. And we’re very, very optimistic and confident at this point that it’s going to stick.
Tony Rizzuto – Dahlman Rose & Company
Are you seeing, Jack, you’re competitors following along in this move also?
Jack Hockema
Well, I can’t speak for the competitors. All I can say is that we got hammered pretty good by a lot of customers.
And we kept selling through it. We just persisted through the last six weeks, really, since we’ve introduced this.
And we’re seeing that resistance weaken, which would suggest to us that competitors must be coming along in some similar fashion.
Tony Rizzuto – Dahlman Rose & Company
Okay. Just a follow-up on the heat treat market a little bit.
So generally speaking, I mean, how are you finding inventories right now in the pipeline. Obviously, some of the other metals, titanium, we’ve got quite a dislocation going on.
What would you say about the heat treat aluminum sheet and plate out there in the supply chain?
Jack Hockema
I think it’s exactly what you would expect from a supply environment. It’s been on our allocation for four years.
And that is that every pound that’s been produced and shipped, basically, is getting used. That’s our view at this point.
Tony Rizzuto – Dahlman Rose & Company
Okay. So it’s still a relatively market compared to –?
Jack Hockema
Yes. Yes, exactly.
We think that, still this year, there are extrusions being substituted for applications where people haven’t been able to get plate.
Tony Rizzuto – Dahlman Rose & Company
All right. Basically, that’s our – that’s a similar read to what we’re getting.
Then the final question I have right now is, you talked a little bit about growth initiatives. And it seemed like your voice perked up a little bit.
And it kind of made me think that you’ve got some acquisitions in mind. Could you expand a little bit on your full process there?
Jack Hockema
Boy, Tony. You didn’t even see body language.
I don’t think my voice perked up. If it did, it was unintentional.
We’re basically the same place that we have been, which is we’re really proactively and we’re talking – we got a lot of lines in the water. Let me characterize it that way.
We’re very optimistic that some things are going to happen over time. But I’m not suggesting that there’s anything imminent.
Tony Rizzuto – Dahlman Rose & Company
All right. I guess my sense here – just certainly, my viewpoint on that, I think investors and analysts following your company would love to see you digest what you have on your plate right now before you dive into the acquisition market.
And we’d like to see that fully absorbed. Obviously, you’ve had a lot of dislocation going on and will continue to do so.
And I think the market would feel better about seeing Kaiser operating on a more normalized rate.
Jack Hockema
Well, I think that’s a fair assessment, and it’s not out of line with management’s assessment nor the Board’s assessment. So while we have a dry – a lot of dry powder, as we say, and financial capacity to do acquisitions, we’re looking very selectively at we would do.
And before we would trigger – pull the trigger on anything, we clearly will satisfy ourselves as management that it is clearly digestible and we have a very clear integration plan that we can execute. And I can assure you that our Board will insist upon that same level of due diligence before they allow us to proceed with an acquisition.
Tony Rizzuto – Dahlman Rose & Company
All right.
Jack Hockema
So it’s a fair comment, but that doesn’t mean that there aren’t opportunities out there that we couldn’t digest at this point if we reach an agreement with third parties.
Tony Rizzuto – Dahlman Rose & Company
Right. Are these opportunities – they tend to be more – maybe in the long parks here.
We know there’s a lot of capacity and is it more around a strategy of maybe a rollup strategy perhaps?
Jack Hockema
I wouldn’t characterize it as a rollup strategy. I think our strategy is more focused on complementary acquisitions where there’s a very clear strategic fit, and where there’s a very clear path for creation of value.
The population of those kinds of acquisitions, especially those that are readily digestible, would tend to be more in the long products than it would be in the flat rolled products where you get much larger companies or much larger operations. But that doesn’t preclude us having some things that would happen in the flat rolled side as well.
Tony Rizzuto – Dahlman Rose & Company
Can you comment – if you’re taking a close look at the Alcan engineered products division?
Jack Hockema
I wouldn’t comment on speculation about that. I’ll let Rio and Alcan comment on whatever sales process they would have, if they have one.
I’ll just comment that there are a lot of assets in the entire marketplace that we believe would be complementary to us. And we continue to look at all avenues for complementary acquisitions that can create value for us within our strategy.
Tony Rizzuto – Dahlman Rose & Company
Thanks, Jack.
Operator
We’ll go next to Tim Hayes of Davenport Company.
Tim Hayes – Davenport Company
Hi. Good afternoon.
Jack Hockema
Hi, Tim.
Dan Rinkenberger
Hi, Tim.
Tim Hayes – Davenport Company
I have several questions. Starting with just clarifying heat treat shipments, did you get any increase in heat treat shipments in Q1 from the phase two expansion?
Dan Rinkenberger
We were up about 5% in the full – half year. And then we actually – I think we commented in our last call that we were slightly higher than the prior year first quarter.
And the first quarter of ’07 was the peak, the highest quarter that we’d realized at that point in time. So as your point, it was slightly higher, but it was not hugely higher.
Tim Hayes – Davenport Company
All right. And then, you made mention about production could be down a little bit in Q3 for heat treat.
What about shipments, though, because you were building ahead – building inventory ahead of that just so you can keep satisfying customers. How would shipments look?
Jack Hockema
That’s a good question, Tim. We expect shipments are pretty much going to match production.
We did not get as much past the heat treat furnaces as we had hoped to prior to taking the furnace down. But still, the shipments – we’ve changed the numbers here to express it as percentage of capacity.
In the first half, we ran around 82% of next year’s – the day three full capacity. And we’ll be within a few percentage points of that, if not at that rate for the third quarter.
So we’ll be shipping very close to the same pace in the third quarter as we did the first two quarters, maybe down slightly, but not materially.
Tim Hayes – Davenport Company
Right. And then, in terms of spot pricing for the non-aerospace plate, how has that trended, the spot pricing, the Q1 to Q2?
And how is it shaping out so far from what you can tell in Q3?
Jack Hockema
I won’t talk about spot specifically because there are some many varieties of spot. The answer is it depends.
I’ll just say that when we look at our total basket of customer mix and product mix, and spot and contract, we’ve been at a very steady level comparable to that 2007 rate since the fourth quarter of 2006. So we’re really – and it’s basically held at those levels through the first two quarters.
And we expect the third quarter is going to be the same level. So we basically got eight quarters or two full years operating at the kind of pricing that we saw through 2007.
Tim Hayes – Davenport Company
Okay. And then, in terms of the smelter, we heard from reports from Rio Tinto – they’re questioning about restarting that third potline.
If the smelter’s going to be shutdown in September, does it make sense or is it – make cost sense to restart the third potline if it’s going to – if the whole smelter would be taken down in less than a year? What’s your opinion on the – I mean you said that the third potline is up in November.
Are you quite confident that that will occur?
Jack Hockema
Yes. It’s actually the second potline.
There are two potlines at Anglesey and we think that the odds are extremely high that that will proceed as we stated.
Tim Hayes – Davenport Company
Okay. And then, in terms of finding available or alternative power for that smelter, we’re under the impression that just the nuclear facility would be the only alternative power to source the smelter.
Is there some other source that’s possible?
Jack Hockema
Well, in the near term, I think that’s correct. But in the long term, there could be other sources of power.
Tim Hayes – Davenport Company
I’m just kind of curious, what might those be?
Jack Hockema
I can’t comment. I’m not that close to the Anglesey situation.
I can just tell you that our people who are on the board there report that they are looking at alternative sources of power for the long term beyond when we’ll be in operation.
Tim Hayes – Davenport Company
Very good. Thank you.
Operator
We’ll go next to Seaver Wang, Utendahl Capital.
Seaver Wang – Utendahl Capital
Hi. Good afternoon.
I’ve got a few questions. You said that you thought you’d be about 70% caught up with pricing by fourth quarter that, of course, assumes that energy prices stay flat?
Jack Hockema
No. On our Web site, we have detailed analysis of how we apply the energy surcharge and is very transparent, which is part of how we’ve sold this to the marketplace.
We actually take the Department of Energy numbers for natural gas prices, for electricity prices, and for diesel fuel prices, and roll those into a specific calculation of the energy surcharge, and we apply it two months after the fact. So in the month of August, we are working on an energy surcharge for our 6,000 series alloys, our common alloys of $4.08 per pound.
And that is a reflection of actual natural gas price, electricity price, and diesel fuel price from the month of June. And every month, we recalculate based on the new prices and change the surcharge either up or down.
Seaver Wang – Utendahl Capital
Okay.
Dan Rinkenberger
These are numbers that are compared to the average price of 2007. So it’s increases in those prices versus the benchmark of ’07 that give rise in surcharge.
Seaver Wang – Utendahl Capital
And then to get caught up 100%, are we looking at second quarter –?
Jack Hockema
No. The 70% issue – let me explain how that happens.
We’re passing through on a cost per pound basis, numbers that are designed to cover all of our incremental energy cost compared to a 2007 baseline as Dan said. The reason that we’ll only have approximately 70% coverage by the end of the year is that we do have some contracts that we’re not able to pass through the energy prices.
Seaver Wang – Utendahl Capital
Okay.
Jack Hockema
So yes. But as those contracts rollover overtime, we’ll install energy price escalators and other price escalators as part of new contracts.
Seaver Wang – Utendahl Capital
Okay. So basically, by the beginning of the next year with the new – with the rollover that that should –?
Jack Hockema
No. We have some contracts that are run several years.
So it will begin to creep up – it could be – I’ve done some rough calculations that it potentially could be in the 80% range next year. But it will take a few years to get beyond 80%.
Seaver Wang – Utendahl Capital
Okay. Can you give us a year-over-year estimate of aerospace related products, what the growth was?
Jack Hockema
You’re talking the growth –
Seaver Wang – Utendahl Capital
For any aerospace related products you had because aerospace is kind of the strongest market right now for you guys.
Jack Hockema
Yes.
Dan Rinkenberger
Seaver Wang – Utendahl Capital
Right.
Dan Rinkenberger
I think you can pick that off the information that you see from – via airline monitor, demand drivers that we see. And Jack’s got the slide in front of him for the new airline monitor forecast.
Yes. It says that what’s going on with the growth in aerospace demand.
Jack Hockema
Yes. We can supply that information.
It’s public information I believe, the airline monitor forecast. Yes, yes.
We can tell you what those builds are. We just don’t have it on our fingertips.
Seaver Wang – Utendahl Capital
Okay. And just last question on the dividend, do you have a target for that going forward in terms maybe percentage of net income or EBIT?
Jack Hockema
No. We’ve not determined it in that fashion.
We look at it every year. Actually, every quarter, but really take a hard look at it every year to determine if the level’s appropriate or if it should be changed.
And as you know, we just in June made a decision to pump at 33%. And that was after thorough analysis that we felt that was sustainable for the long term.
Seaver Wang – Utendahl Capital
Okay. All right.
Thank you.
Operator
We’ll go next to Dan Whalen, Dahlman Rose.
Dan Whalen – Dahlman Rose
Hi, everyone.
Jack Hockema
Hi, Dan.
Dan Whalen – Dahlman Rose
Jack Hockema
Yes. It’s actually a combination of two factors.
But let me answer the second question first. Yes.
We believe that the combination of new programs and exports – we have new export opportunities. The combination of the two will offset the decline in the domestic build rate.
And our total automotive shipments will be equal to or greater than the prior year.
Dan Whalen – Dahlman Rose
And roughly speaking, that’s maybe 5% of your overall revenue?
Jack Hockema
Automotive is closer to 10 %.
Dan Whalen – Dahlman Rose
Ten percent. Okay.
And then, is there any similar programs that on the truck and trailer perspective? How are your tracking relative to the overall truck and trailer industry?
Jack Hockema
Well unfortunately, we’re tracking right with it, which is in the toilet. I mean, truck and trailer had just – they were hammered already last year.
And they were a lot of projections that they were going to pick up this year. And it’s just – it’s persistently down.
It is really – we’ve been through a lot of these. I mean, it’s the nature of that truck and trailer business.
But this one is lasting longer than any I remember. Maybe it’s just because it’s the last one.
But this has sure been a long one.
Dan Whalen – Dahlman Rose
Right. I mean, can we see some stabilization next year or –?
Jack Hockema
Well it’s unfortunately it’s stabilized now. But it’s stabilized in the gutter.
I mean, it’s really down. I think we’re down approximately 50% from the prior rate.
So we’ve been there for a couple of years. We think we’ll start to see some heavy truck builds pick up later this year – later next year when there’s a change again in the emission standards.
But the latest forecast that we get from the forecasting services that we use, really don’t project it picking up until second half of next year in truck. In trailer, we’re not seeing any real forecast of above text either.
Of consequence, there maybe a little bit of growth, but nothing significant.
Dan Whalen – Dahlman Rose
All right. So there’s no real downside potential here, but –
Jack Hockema
Well there’s always a downside. But, boy, I think this is about as bad as it gets.
Dan Whalen – Dahlman Rose
Right. And ballpark, in terms of total revenue, what is the exposure there?
Jack Hockema
It’s less than 5%.
Dan Whalen – Dahlman Rose
So we’re talking 15% overall.
Jack Hockema
Between ground trans. Yes.
Dan Whalen – Dahlman Rose
Ground transportation to –
Jack Hockema
Yes. Mid to high tens.
Dan Whalen – Dahlman Rose
I got you. I got you.
And then just in terms of taking a step back in terms of – can you give us an update in terms of your spot versus your contract business, just to kind of give us a sense of how much exposure you really have to the spot business right now?
Jack Hockema
Well we have significant exposure to spot business we have historically. And we continue to have – I mentioned in my comments that a lot of this year has spent on qualifications of our heavy gauge plate for aerospace applications.
So a lot of that contract volume has not yet kicked in. So we’ll see the contract business growing as we go forward.
But it always will be a variable depending on – for our contract customers, many of them are not on a firm volume basis. So it can be a variable demand.
At a maximum, I think we could get up in the 75% to 80% of contract business if everyone took their full capacity allocations. But that’s not happening.
So our spot business will be north of that 30% or so as we go forward.
Dan Whalen – Dahlman Rose
Okay. And that’s firm wide or just the heat treat?
Jack Hockema
I’m sorry.
Dan Whalen – Dahlman Rose
That’s company wide or just –?
Jack Hockema
No. No.
No. I’m just talking about heat treat.
Dan Whalen – Dahlman Rose
Heat treat.
Jack Hockema
Yes, yes.
Dan Whalen – Dahlman Rose
I just want to make sure.
Jack Hockema
Yes. Company wise is much – well company wide, you can go back to the numbers that I used on the surcharge where I said we expect to be 70% by the end of the year that basically covers our spot business.
Dan Whalen – Dahlman Rose
Okay.
Jack Hockema
And then we have short – we have contracts, for example, some of our automotive customers are one, two, or three-year contracts, those kinds of things. So those begin to rollover as we move forward.
Dan Whalen – Dahlman Rose
Right. Well thank you very much.
Operator
We’ll go next to Brett Levy, Jefferies & Company.
Brett Levy – Jefferies & Company
Hey. Most of my questions have been asked.
What portion of your business is exposed to housing?
Jack Hockema
Virtually none.
Brett Levy – Jefferies & Company
Got it. And then, I mean if you look at some of the guys that are in these businesses that are exposed to trucking or auto or housing, you think there’s going to see some bankruptcies?
And are you guys kind of watching out for what’s going on, on that space?
Jack Hockema
Yes. We watched that, but that’s – we really have not seen that as a market that we want to participate in.
We prefer the more demanding applications where it’s easier to create a defensible, competitive position. Whereas most of those markets are pretty pure commodity markets, is our view.
So yes, we watch it. But are they high on our shopping list?
The answer to that would be no.
Brett Levy – Jefferies & Company
All right. Thanks very much, guys.
Jack Hockema
That’s housing, where there automotive suppliers that are in demanding applications similar to ours, we certainly would consider those.
Brett Levy – Jefferies & Company
Okay. Thanks for the clarification.
Operator
Well go next to Matt Teplitz, Quaker Capital Management.
Matt Teplitz – Quaker Capital Management
Hello, gentlemen.
Jack Hockema
Hi.
Matt Teplitz – Quaker Capital Management
Hi. A few questions for you, you spoke about these challenges in terms of qualifying or at least taking a longer, perhaps, unexpected.
Can you show a little light there? Is that in terms of new customers or just new parts of your mill having brought on the capacity?
Jack Hockema
It’s really a function of our changing capabilities where we historically have supplied light gauge plate. And now, with the phase two expansion, putting in the stretcher that now gives us the capability to supply thicker plate.
And the qualification to supply that thick plate to the aerospace – various aerospace customers, not just Boeing and Airbus, but every aerospace customer has very rigorous qualification procedures required. So it’s really a multitude of customers and a multitude of applications within each of those customers where we’ve had to develop and demonstrate capability to very demanding standards.
And we knew it was going to be difficult. But it’s proven to be an even greater hurdle than what we anticipated.
That’s the bad news. The good news is that we’ve established tremendous credibility with our customers in terms of how promptly we’ve been able to deal with these issues and get qualified.
And we also have developed capabilities that are beyond what we anticipated. Both in the cross sectional area that we can provide for our customers, but also the quality attributes of the plate that we’re producing.
So our technical people have done just a terrific job at Trentwood with this. And it truly enhanced our image in the marketplace.
And has created capabilities beyond what we thought we would have from the expansion.
Matt Teplitz – Quaker Capital Management
I mean is this a large dollar number, at least in terms of ,what, I guess, taking longer to qualify?
Jack Hockema
No. It’s virtually impossible to quantify it.
The real issue is that it’s consumed our brain trust for most of this year. And at the same time we’re expanding capacity and we’re running at capacity while our brain trust is basically preoccupied with the qualifications.
So as issues develop and come up, it was a distraction and more of a nuisance rather than a big dollar item. It’s tough to put your arms around it, other than you know it was a distraction for the operation.
Matt Teplitz – Quaker Capital Management
And just curious, what would the brain trust have been doing if it hadn’t been distracted here? Or where would it –
Jack Hockema
Well I mean these are the people that run the processes in the plant. I mean, it’s all the metallurgists; it’s the engineers; the process engineers; it’s the manufacturing people.
So it’s – they run a plate through. And then they look and determined if we get – did we get the attributes that we expected.
And if not, then we go back to the lab and tweak the process, and run it right back through the operations. So you’ve got all of those people.
That’s all they’re doing, is working on qualifications. And meantime, there may be a problem that our manufacturing guy has out somewhere in the plant.
And his metallurgist is preoccupied working on the qualifications. It’s just the amount of workload applied to the resources that are available.
And it’s hard to quantify, but it certainly was the – a factor in the first six months of this year.
Matt Teplitz – Quaker Capital Management
Okay. Understood.
I guess one other thing I was hoping you’d clarify, and I think maybe a few people are sort of just trying to get at the same thing, when you talk about your capacity and the percent – I guess, the kind of the heat treat that will be under some form of contract, but it’s not a mandatory take. There is generally a perception that you’re protected by take-or-pay contracts.
And I don’t know whether that perception is accurate or not.
Jack Hockema
That perception would not be accurate. We have some of that.
But to characterize our mix as take-or-pay contracts would be a mischaracterization.
Matt Teplitz – Quaker Capital Management
Okay. So I guess, I’m trying to get at this again.
If you have that 75% to 80% in theory, I guess, most would best be characterized as your customers are entitled to should they still want the plate. How much of that 75% to 80% – I guess, are they obliged or are you protected?
Jack Hockema
Matt, I don’t have that number. But it’s – it’s not a significant percentage, let me just say that, if you talk about the total volume going through the plant.
So is that guaranteed? No.
But as we’ve said on the slide – I don’t know that I had it in my script notes here, but we expect that we’re going to operate at a very high capacity utilization. We have a number of dimensions in the marketplace where we’re a major supplier.
So we believe as long as total demand holds up that we will have robust capacity utilization in our operations.
Matt Teplitz – Quaker Capital Management
Okay. So for instance – I guess the perception has been – unless I’m speaking for myself, but I don’t think it’s uniquely me, that commitments were made to you by Boeing and Airbus as part of your willingness to invest and expand Trentwood significantly.
Were those commitments ultimately more that if there is demand, you’re going to get the large part of it? Or is it more that you would get sort of absolute amount?
Jack Hockema
There are certain agreements that are firm volumes that would amount to a take-or-pay.
Matt Teplitz – Quaker Capital Management
Right.
Jack Hockema
There are certain agreements that are min/max where the customer has a range, within which he can order. And we would price a min/max agreement where it’s basically an option on capacity differently from how we would price a firm take-or-pay type agreement.
Matt Teplitz – Quaker Capital Management
Okay. And it sounds like that min/max was probably the more prevalent form here, is that –?
Jack Hockema
Yes. I mean it is.
When you look at that total capacity, there’s a blend. There’s a large blend of spot business of min/max business, and then of firm volume business.
And the firm volume would be the smallest proportion of the three, I believe. I don’t have any numbers in front of me.
But we’ll see swings in our mix. And we’ve tried to communicate this throughout this whole process of the expansion.
That the pricing that we’ve seen and the mix that we’ve seen is subject to changes as we go forward. And we’ve also indicated that contrary to what some people suggest to us, we’ve been in a sold out position in the industry for four years.
And when the entire industry is on allocation for four years, that has a tendency to create very high spot prices. And when you negotiate a very long term agreement with very large customers it could be at prices that are not as high as what the spot prices have been in a sold out industry market over the pass four years.
So we can’t say with clarity what the price, and mix, and the volume look like over the long term. And that’s why we’ve inserted the chart here that shows us a variety of conditions.
We’ve been operating at capacity for four years. And for the past two years at prices similar to the 2007 level.
But there will be variability over the long term in terms of what the price and mix will be. And what the capacity utilization will be.
Matt Teplitz – Quaker Capital Management
Okay. And as a relief to the spot market for your heat treated plate, I’m assuming that – what are the largest end market applications, presumably some are the aerospace, some are the, I guess, the defense?
Jack Hockema
Yes. Aerospace and defense is a very large segment of the market, the total global heat treat market.
And then for us we have – in contrast to some of the other aerospace suppliers, we historically have been a major supplier of general engineering plate. That’s used for tooling plate.
It’s used in the electronics industry. But it’s really broadly used for industrial applications in North America.
And for us that’s been – that’s been at least half of our business, historically. So it’s always been a major portion of our business.
We’ve been the major player in that business in North America. And it will continue to be a big segment.
Matt Teplitz – Quaker Capital Management
Okay. Can you talk a little bit about what you’re seeing in terms of your export opportunity and how large it might become?
Jack Hockema
Are you speaking specifically to any product or is that a general question?
Matt Teplitz – Quaker Capital Management
I guess its general just because of comments you made here about how you’re getting some upside there – rather too weak North American auto. And just also, hearing a lot of North American manufacturers talk about opportunity you had –
Jack Hockema
Yes. We’ve been a global supplier of heat treat sheet and plate products for many, many years.
And we expect that profile to increase given the capabilities that we’ve introduced at Trentwood. And given the exchange rate and the competitive position that we think we’ll have in the marketplace from a quality and capability standpoint, we think we’ll have good opportunities offshore in sheet and plate.
We’ve also had opportunities in our cold finished bar. While it’s not a big segment of our business, it still is a segment that has export opportunities, has had historically, and we think those will continue to grow.
Same thing for our heat treated drawn tubing. All of the – and the cold finish and the drawn tubing are similar to the sheet and plate, in that they’re primarily aerospace high-tech demanding applications.
What’s relatively new is the development of opportunities, for example, such as the automotive that we talked about where it’s – we have a world-class facility in London, Ontario that’s a premiere producer of ABS block, anti-lock brake system blocks, which is a global market. It’s relatively low value added.
And while we think we’re the lowest cost producer in the world of those products, it hasn’t made sense in the past to export those. But the exchange rate has evolved to the point where it’s created export opportunities for us that we’re beginning to act upon.
So yes. We’ve had a presence, a relatively small presence other than sheet and plate.
It’s growing and if the exchange rate stays where they are ,we anticipate that it will continue to grow.
Matt Teplitz – Quaker Capital Management
Can I ask one other question here that relates somewhat – it’s not so much export, but just again the currency discrepancies in the world. Not that it’s a company strategy, but on a sort of Euro or Yen basis or some any other foreign currency, the company looks, I should think, looks like quite cheap to a potential foreign buyer.
I guess the issue is what a foreign buyer will run into in terms of your end market served in terms, I guess, of defense, would that be a major impediment to someone?
Jack Hockema
Yes. Depending on who it would it be.
I would think so.
Matt Teplitz – Quaker Capital Management
Okay.
Jack Hockema
Yes. We don’t spend a lot of time contemplating that.
But in the hypothetical case, defense would be a major consideration.
Matt Teplitz – Quaker Capital Management
Okay. And on the cost, you cited in Q3 for, I guess, maintenance, which I guess is as much as $ 6 million relative.
Jack Hockema
Yes. Yes.
Matt Teplitz – Quaker Capital Management
Is that primarily just disruptions cost of significant capital expenditures and upgrades you’re making?
Jack Hockema
Well yes. It’s not really disruptions.
Most of it is at Trentwood. Some of it is related to moving an extrusion press from our Richland, Washington plant to Chandler, Arizona.
But most of it is upgrading equipment and bringing some more upstream capacity online around the hot line at Trentwood.
Matt Teplitz – Quaker Capital Management
Okay. But these are actual costs.
So it will be expense, right?
Jack Hockema
Yes. Yes.
Its expense, but we may have a soaking pit furnace that heats metal for the hot line that has to be rebuilt and brought back into service to supply the increased throughput. We have those kinds of projects.
We’ve got other equipment that’s been idle in the past that we’re now bringing back up the speed to introduce it into the operation. We’ve got Hanley equipment that we’re moving around, just a variety of operations at Trentwood where we’ve become bottleneck now on the hot line.
That will be our new bottleneck. So expense type operations just bringing some capacity in the service to fund the heat treat plate club.
Matt Teplitz – Quaker Capital Management
Okay. And last question.
The surcharge that you introduced, does that apply at all to the, I guess, the contract sales under – for heat treat plate or is this for the rest of your products?
Jack Hockema
I won’t speak to individual contracts because there are some contracts that we have that enable us to pass through this costs. But most cases it does not.
So in most of the heat treat plate contracts, we do not have a specific energy escalation clause. In the future, as we enter into contracts, we intend to have those.
Matt Teplitz – Quaker Capital Management
Okay. I’ll tell you one last suggestion, but if the stocks are anywhere near these levels, I would strongly encourage you to buyback what you’ve authorized.
But thank you.
Jack Hockema
And no one else has mentioned that too.
Operator
We’ll go next to Tim Hayes, Davenport Company.
Tim Hayes – Davenport Company
A follow-up on the contract business that has max/min provisions, just want to make a better sense of what the gap might be between the maximum and a minimum. I know that, yes, it can be a sensitive issue, but if I would have put an index for maximum at 100, what would be the minimum generally be around?
Would that be 90% of the maximum or 50% of the maximum?
Jack Hockema
It could be either. It just depends on the agreement, and the customer, and the product.
It could vary by product. So there are a variety of dimensions to it.
Tim Hayes – Davenport Company
Would there be contracts where it’s below 50%?
Jack Hockema
Yes. There are some that can be below 50%.
I’m looking at a resource here. I’m getting hand signals.
Yes. I think – yes.
There are some that could be below 50%. Yes.
Tim Hayes – Davenport Company
I
Jack Hockema
No, no. It can’t.
I don’t have it. But again, it gets back to – it’s a very diverse mix of spot business, of contract business that’s not take-or-pay, and of contract business that is take-or-pay.
Tim Hayes – Davenport Company
Very good. Thank you.
Operator
(Operator instructions) We’ll go back to Tony Rizutto, Dahlman Rose.
Tony Rizzuto – Dahlman Rose & Company
Thank you. What percent of your shipments and revenues overall today are defense related?
Jack Hockema
We have that number, but I don’t have it at my fingertips. I would guess it’s in the teens.
That’s just a guess.
Tony Rizzuto – Dahlman Rose & Company
All right. So maybe 10%, 15% type of thing?
Jack Hockema
Yes.
Tony Rizzuto – Dahlman Rose & Company
Okay.
Jack Hockema
Yes. And maybe a little higher than that even.
So it looks even a broader band, maybe 10% to 20%.
Tony Rizzuto – Dahlman Rose & Company
Okay.
Jack Hockema
And don’t hold me to that, but in terms of – directionally, I think that’s in the ballpark.
Tony Rizzuto – Dahlman Rose & Company
All right. My next question is we’ve had discussions in the past about Airbus and the importance of the A380.
Jack, what would you characterize the level of demand from the A380 program is today compared to a more steady state or as it were ramp up to what the fore-per-month over the next couple of years?
Jack Hockema
Well in reality, and this is going to contradict my answer to your prior question about inventories, but the one place where there was inventory, I think, was bringing in plate for the A380 where Airbus had anticipated build rates that they weren’t able to meet. So I think the actual demand for the A380 was really fulfilled.
We haven’t seen very much of that. And then as they begin to work off inventories, we’ll start to see that demand wrap up.
But right now, in 2008, I think there’s been very little, mill demand supporting A380.
Tony Rizzuto – Dahlman Rose & Company
Well that’s what I mean. I’m just trying to get a better handle about where they are ensuing through some of that.
Obviously they’re doing better, and they seem like they’ve come through those issues that plague the program.
Jack Hockema
Yes. I think we’re going to start to see that ramping up.
They’ve got to be getting fairly close to have worked that off. I don’t know specifically, but we continue to believe that we’re going to see very strong and growing demand from aerospace in total here.
Tony Rizzuto – Dahlman Rose & Company
Okay. Okay.
Just correct me if I’m wrong. But it’s been that demand particularly for the A380 with the very thick gauge plate, which really played into your sweet spot, does it not?
Jack Hockema
Well yes. But again, we just – from our standpoint, what’s important is what’s the size of the total market.
It’s not necessarily which programs, but the A380 is a plate hog. It uses a lot of plates.
So whether we supply plate or someone else supplies plate is less important to us than the fact that it’s just the total demand for our products in the marketplace.
Tony Rizzuto – Dahlman Rose & Company
Okay. And the final point of observation, whatever you want to call it, I like to look at how sock prices perform over a conference call.
And your stock was – as you began the call, it was down about, I don’t know, 2.5% roughly speaking. It’s now down about 9.5%.
It was down more than 10% just a few moments ago. And the question I – I think it’s also related to a previous question, you guys have a billion dollars of NOL that’s got some considerable value.
You’re in a weak commodity based currency or a certainly weak currency country. You’ve got enviable positions with, certainly, leading aircraft manufacturers.
And from a defense standpoint, I mean, are you feeling vulnerable here? Does it make sense to maybe leverage up that balance sheet?
Forget about other opportunities for growth, but maybe to take out some debt here. You’re just buying your stock.
What other use of capital could be a better return than buying your stocks at these levels?
Jack Hockema
Well, let me understand your point clearly, Tony. Let me just say, and we’ve stated this many times that we really look at hierarchy of three levels.
One is good organic growth, investments, and acquisition investments, so good investments grow the business. Our second hierarchy is share repurchases.
And the third is to give dividends to our shareholders. And we monitor those continuously, so.
And we review those continuously with our Board as well. So yes, we evaluate those.
And if something like that were to develop as a better use of our capital than investments, then we certainly would consider that.
Tony Rizzuto – Dahlman Rose & Company
Okay. Thank you very much.
Operator
That concludes the answer-and-question session today. At this time, Ms.
Ellsworth, I’d like to turn the conference back to you for any additional or closing remarks.
Melinda Ellsworth
Thank you. Thank you everyone for joining us today.
A replay of this conference call will be made available on our Web site in the Investor Relations page later today. Thank you, and have a good afternoon.
Operator
That does conclude today’s conference. Thank you for you participation.
You may disconnect at this time.