Oct 21, 2014
Executives
Melinda Elsworth – Vice President and Treasurer Jack Hockema – President and CEO Daniel Rinkenberger – EVP and CFO Neal West - VP and Chief Accounting Officer
Analysts
Steve Levenson - Stifel Nicolaus & Co Timna Tanners - BofA Merrill Lynch Sal Tharani - Goldman Sachs Josh Sullivan - Sterne, Agee & Leach, Inc. Brian Ossenbeck - JPMorgan Phil Gibbs - KeyBanc Capital Markets Tony Rizzuto - Cowen & Co Edward Marshall - Sidoti & Co
Operator
Good day and welcome to the Third Quarter 2014 Earnings Conference Call. Today's call is being recorded.
At this time, I would like to turn the conference over to Melinda Ellsworth. Please go ahead ma’am.
Melinda Elsworth
Thank you. Good afternoon everyone and welcome to Kaiser Aluminum’s third quarter 2014 earnings conference call.
If you’ve not seen a copy of our earnings release, please visit the Investor Relations page on our website at kaiseraluminum.com. We have also posted a PDF version of the slide presentation for this call.
Joining me on the call today are Chairman, President and Chief Executive Officer, Jack Hockema; Executive Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neal West. Before we begin, I would 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, earnings presentation and our most recent 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, 2013. 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 also provided reconciliation from the appendix.
At the conclusion of the company’s presentation we will open the call for questions. At this time, I would like to turn the call over to Jack Hockema.
Jack?
Jack Hockema
Thanks Melinda and welcome to everyone joining us on the call today. Despite continued strong underlying product demand and manufacturing cost performance in the third quarter, our results were negatively impacted by two unanticipated temporary events in our Trentwood operations that caused results to fall short of our expectations.
In an effort to further enhance quality attributes and customer performance of our KaiserSelect Plate products, we made a minor process refinement that unexpectedly and temporarily resulted in higher internal scrap, remix and lost opportunity for additional spot business during the quarter. In addition, we experienced unplanned downtime in our Aerospace Sheet processing operations that although not a significant further impacted shipments during the quarter.
These two issues had a direct quantifiable effect on EBITDA of $5 million in the third quarter. There was also an indirect opportunity cost impact from disruption and from diverting key technical and managerial resources from work on proactive initiatives to capitalize on potential process improvements enabled by our Phase 5 and the new casting complex.
Both of the unanticipated situations have been resolved and we do not anticipate any further impact in the fourth quarter. Although the third quarter earnings came in below our expectations, these temporary events mask solid underlying performance highlighted by near record quarterly heat treat plate and automotive extrusion shipments.
Additionally, we continue to benefit from the strategic investments we made over the past several years, generating strong underlying manufacturing cost performance in the quarter. Also the result of resulting quality enhancement positions us for further differentiation of our aerospace product offering and our early detection and problem solving procedures have been enhanced as a key learning from the third quarter experience.
Longer term, we expect continued benefits as our Phase 5 heat treat plate expansion and new casting complex ramp up to full production and as we continue to capitalize on further demand growth in automotive and aerospace applications. I'll provide additional comments regarding the near-term outlook after Dan provides some further discussion on the third quarter results.
Dan?
Daniel Rinkenberger
Thanks, Jack. Turning to Slide 6, the total value added revenue in the third quarter was comparable to the third quarter of 2013.
With the launch of numerous new automotive programs in 2014, automotive extrusion value-added revenue during the quarter was 24% year-over-year improvement. This offset value added revenue declined in aerospace and general engineering end used categories where despite near record heat treat plate shipments, competitive plate pricing led to reduced third quarter value added revenue.
EBITDA and EBITDA margin in the third quarter improved slightly compared to the prior year quarter as significantly improved manufacturing efficiency, higher automotive extrusion sales and the impact of higher aerospace and heat treat plate shipment volumes essentially offset competitive pricing pressure experienced in heat treat plate products. On a sequential basis, third quarter value added revenue declined nearly $10 million from the second quarter, reflecting forgone shipments due to the manufacturing process refinements for heat treat plate and unplanned downtime for heat treat sheet products that Jack mentioned earlier as well as seasonal declines for some other products.
While the manufacturing process changes prevented us from achieving our potential in the third quarter, we nevertheless saw strong heat treat plate shipments. In fact, quarterly shipment volumes of both heat treat plate and automotive extrusions were only slightly behind our shipment records for these products in the second quarter of this year.
Third quarter EBITDA declined approximately $5 million sequentially to $41 million and EBITDA margin declined from 24.4% to 22.7%, primarily due to the volume and cost impacts in the third quarter of the plate manufacturing process changes and the sheet equipment downtime at Trentwood. Even though we incurred incremental costs from higher internal scrap and remake plate during the quarter, we continue to see strong manufacturing conversion cost performance.
Turning to Slide 7, our total value-added revenue in the first nine months of 2014 of $555 million was a slight improvement over the prior year. Automotive extrusion value-added revenue increased $21 million or 43% over the prior year period.
Value-added revenue for aerospace and other products declined at $19 million from the prior year period as competitive price pressure, particularly for heat treat plate products more than offset higher shipment volumes. EBITDA in the first nine months of 2014 of $124 million declined approximately $8 million from the prior year nine-month period.
This year-over-year decline was driven by several factors. The 2013 period benefitted from a $4.5 million aerospace customer contract payment.
Additionally a $4 million adverse sales impact compared to the prior year period reflects competitive pricing pressure on heat treat plate products, which was partially offset by higher shipment volumes of most products. Also planned major maintenance expense and energy purchase prices were each approximately $3 million higher in the first nine months of this year compared to last year.
But offsetting much of these negative impacts, manufacturing conversion and other costs improved over the prior year. These factors also accounted for the decline of EBITDA margin to 22.3% in the first nine months of 2014 from 24% the prior year.
On Slide 8, we show key consolidated financial metrics. Consolidated operating income both as reported as well as adjusted for non-run rate items was $33 million for the third quarter.
In addition to my earlier comments about EBITDA, the $1 million reduction in operating income compared to the prior year reflected additional depreciation expense. For the first nine months of 2014 consolidated operating income as reported of $111 million included almost $11 million and non-run rate gains.
Adjusting for these non-run rate gains, first nine month consolidated operating income was $101 million, which was down $11 million from the first nine months of 2013. In addition to the items I previously discussed with respect to EBITDA, the decline in adjusted operating income reflected $2 million of additional depreciation expense in 2014.
Reported net income for the third quarter was $16 million or $0.85 per diluted share. For the first nine months of 2014, reported net income was $56 million or earning per diluted share of $3.02.
Excuse me. Adjusting for non-run rate items net income was $15 million for the third quarter or $47 million for the first nine months -- let me take the -- or adjusted earnings per diluted share -- yeah, Jack, you better take it.
Jack Hockema
Okay. Dan has developed a frog in his throat.
Melinda Elsworth
The earnings per diluted share was $0.79 for the quarter and $2.54 for the first nine months. While our effective tax rate was 37% for both the third quarter and the first nine months of 2014, we continue to apply our net operating loss carry forwards resulting in a cash tax rate in the low single-digit percentages.
Capital spending in the first nine months of 2014 totaled $40 million, and we continue to expect capital spending for the full year will be between $50 million and $60 million. During the first nine months of 2014, we repurchased approximately 411,000 shares of our common stock for $29 million and we paid $19 million in quarterly dividends.
As of September 30, cash and short-term investments exceeded $300 million and revolving credit availability exceeded $250 million. As we move into 2015, we anticipate that our strong cash flow and liquidity will fund our ongoing business needs, organic investments and repayment of our convertible notes at maturity in April of 2015, and continue to allow us to return cash to shareholders.
And now, Jack will discuss our business outlook. Jack?
Jack Hockema
Okay. Thanks, Melinda.
Dan is recovering here. Turning to Slide 9, and a discussion of our aerospace and high-strength applications, we anticipate that normal seasonal demand weakness in the fourth quarter will be offset as the supply chain inventory overhang for these products continues to obey.
We remain optimistic that this trend will continue in 2015 and the demand for our aerospace products will continue to gain strength. Turning to slide 10, in the automotive outlook we expect underlying demand strength in the fourth quarter as normal seasonal weakness is offset by continued content growth for crash management and body and wide and applications.
Beyond 2014, we expect these positive trends to continue in automotive with steady long-term growth in content per vehicle as we launch new programs in 2015 and further capitalize on a strong and growing pipeline of opportunities for new automotive extrusion programs. Slide 11 addresses our outlook for general engineering and industrial applications.
Consistent with prior years we anticipate normal seasonal demand weakness for these applications in the fourth quarter. At the same time, we note that service center rod and bar's shipments for the first nine months of this year are equal to the prior record level set in 2006 are back consistent with the slow but steady recovery trend in the U.S.
industrial economy. We're optimistic that we'll see continuing underlying demand growth for general engineering and industrial applications as we go into 2015.
Slide 12 summarizes our short-term outlook. As in prior years we have significant plant maintenance in the fourth quarter which this year includes an extended planned outage in our Newark, Ohio facility that is expected to be completed in the quarter.
In addition, we expect normal seasonal weakness in the quarter to offset improving underlying demand for aerospace and automotive applications. Considering these factors we anticipate value-added revenue and EBITDA in the fourth quarter similar to the third quarter.
As a consequence of the third quarter earnings coming in below our expectation we now anticipate that full year 2014 EBITDA will fall slightly below 2012 and 2013 levels. Looking to 2015, we remained positive as we are positioned to continue improving our manufacturing cost performance.
The aerospace supply chain inventory overhang is slowly abating. Our aluminum extrusion content for automotive applications is positioned for further growth.
And underlying general industrial demand is demonstrating slow but steady improvement. We'll provide additional color on 2015 outlook on the next call.
While our third quarter results were affected by a couple of temporary challenges, the underlying performance was solid. We remained very positive regarding Kaiser's 2015 and longer term prospects and our ability to continue to drive shareholder value as we realize the full benefits from strong secular demand fundamentals for our aerospace and automotive applications and improving manufacturing performances result of the capital investments made to support profitable growth.
Our priorities for capital deployment will continue to be balanced among the combination of investments to drive organic and inorganic growth, increasing quarterly dividends and returning cash to shareholders in the form of share repurchases. We will now open the call for questions.
Operator
(Operator Instructions) And we'll take our first question from Edward Marshall with Sidoti & Company.
Edward Marshall - Sidoti & Co
Good afternoon, good morning. How are you?
Jack Hockema
Good Ed.
Edward Marshall - Sidoti & Co
So I am curious, if you could, when you look at the outlook for 4Q '14 and when you say that it's going to be on par with 3Q from both value-added revenue as well as EBITDA, I am curious if you are assuming that additional $5 million adjustment for the related inefficiencies that you saw in 3Q. Or do you mean just -- does it include that $5 million, or not?
Jack Hockema
No. Well, its -- we're talking about the as reported third quarter.
Edward Marshall - Sidoti & Co
Okay. And then the inefficiencies that you did see in the quarter in the KaiserSelect product, was that a change that was requested by a customer?
Or potentially was it a chance for you to differentiate yourself? Or better yet, was it a potential for you maybe to save some cost on a process adjustment?
Just curious what might have caused that?
Jack Hockema
Actually it was both. It was a customer request for a new process that they installed that we think will become widespread through the industry and so we made a minor adjustment to our process in order to accommodate that attribute.
Edward Marshall - Sidoti & Co
And as from the cost side, was that -- is there…
Jack Hockema
No, not from cost -- it didn't have any impact on the cost side. It was a rather minor process change in our heat treat operation.
Although, unfortunately, as sensitive as these products are, there's nothing such as a minor change in process.
Edward Marshall - Sidoti & Co
And the last question I wanted to ask is on EBITDA margin. And if I add that $5 million back, and I assume that you probably lost a little bit on value-added revenue as well, but that yields a 25.5% EBITDA margin.
What's the accompanying value-added revenue that you may have lost in the quarter? Have you quantified that?
Jack Hockema
It's very close to that $5 million.
Edward Marshall - Sidoti & Co
Okay. So it is a good drop through.
Okay. I appreciate it, guys.
Thank you very much.
Operator
And we'll move to our next question from Steve Levenson with Stifel, Nicolaus.
Steve Levenson - Stifel Nicolaus & Company
Thanks. Good afternoon, or good morning, depending on where you are.
When you made the process change, does that require a new certification? Or is the customer -- are all customers prepared to take the material under the new process.
Jack Hockema
Yeah. This was -- it was a minor process change that actually just addressed a cosmetic issue and actually the issues that we ran into were on some different attributes that were affected that are in other parts of the operation.
Steve Levenson - Stifel Nicolaus & Company
Okay. Thanks.
There's been a lot of talk in aerospace about -- concern about order backlog given the decline in oil prices. I don't know if you can comment on that as to your opinion.
Jack Hockema
Steve, you have your opinions on this I'm sure, but our opinion is these backlogs continue to be robust. As you know, Boeing just announced a ramp up in their build rates on 737.
So we remained just as bullish as we have been on the backlog and the build rates going forward.
Steve Levenson - Stifel Nicolaus & Company
Okay. I think we are thinking the same way on that one.
Just appreciate your color on the question. Thanks very much.
Jack Hockema
Yes Steve.
Operator
And we'll move to our next question from Timna Tanners with BofA Merrill Lynch.
Timna Tanners
Yes, hey, good afternoon, good morning, guys.
BofA Merrill Lynch
Yes, hey, good afternoon, good morning, guys.
Jack Hockema
Hey Timna.
Daniel Rinkenberger
Hi Timna.
Timna Tanners
Hello. So glad you got your voice back.
The fact that you bought back shares in the quarter, does that signal that maybe the M&A opportunities aren't really presenting themselves right now? Just wanted to get a sense of your latest thoughts on using cash.
BofA Merrill Lynch
Hello. So glad you got your voice back.
The fact that you bought back shares in the quarter, does that signal that maybe the M&A opportunities aren't really presenting themselves right now? Just wanted to get a sense of your latest thoughts on using cash.
Daniel Rinkenberger
Well, I think the share repurchase has been consistent with what we’ve been doing for a long time and so with or without M&A opportunities we’re pursuing the share repurchase as an appropriate balanced of using our cash flows in the organization.
Timna Tanners
Okay. Are you seeing more import pressure because of the stronger U.S.
dollar? That's certainly a theme that keeps coming up.
Can you comment on that?
BofA Merrill Lynch
Okay. Are you seeing more import pressure because of the stronger U.S.
dollar? That's certainly a theme that keeps coming up.
Can you comment on that?
Jack Hockema
We really haven’t seen anything at this stage Timna. That doesn’t mean that we won’t see more pressure but we’ve already seen a lot of pressure frankly over the past several months.
Timna Tanners
Okay, so nothing different, but definitely has been some pressure.
BofA Merrill Lynch
Okay, so nothing different, but definitely has been some pressure.
Jack Hockema
Yes.
Timna Tanners
And then the only other question I wanted to ask about -- cool. In the past you talked a little bit about the restocking and the destocking trends.
If I missed that I'm sorry; but can you just give us updated thoughts on where your customers are and where the aerospace cycle is and channels regarding the destocking? I think you had talked about expecting the destock to run its course, or at least the bulk of it, by the end of the year.
Is that still the way you are looking at it?
BofA Merrill Lynch
And then the only other question I wanted to ask about -- cool. In the past you talked a little bit about the restocking and the destocking trends.
If I missed that I'm sorry; but can you just give us updated thoughts on where your customers are and where the aerospace cycle is and channels regarding the destocking? I think you had talked about expecting the destock to run its course, or at least the bulk of it, by the end of the year.
Is that still the way you are looking at it?
Jack Hockema
I don’t think it will be done by the end of the year. What we’re seeing is the destocking steadily abating here and we see improvement in the fourth quarter.
We saw improvement in the third quarter. So its slowly and steadily abating and we expect we’re going to have a good strong 2015, but I don’t know that that means that all other destocking is over, but we’re getting close to the end of most of our aerospace products.
Timna Tanners
That sounds consistent with what you were saying before. Any changes in the way you have seen that play out?
BofA Merrill Lynch
That sounds consistent with what you were saying before. Any changes in the way you have seen that play out?
Jack Hockema
No, I think that’s pretty much the same as what we’ve said that it's slowly and steadily abating. We don’t step changes as we go forward.
Timna Tanners
Okay. Cool.
Thank you.
BofA Merrill Lynch
Okay. Cool.
Thank you.
Operator
And we’ll move to our next question from Sal Tharani with Goldman Sachs.
Sal Tharani - Goldman Sachs
Thank you. Can you remind us how much you have to pay approximately for the converts next year?
Daniel Rinkenberger
Well, the face amount is $175 million. They have been trading well above that of course because of the cash value would be probably 160% of base, but we do have the option assets that will cover the amount of -- amounts we pay to our convertible bond holders in excess to the principal amount.
So we’re basically hedged for anything above 175.
Sal Tharani - Goldman Sachs
Okay. I am just wondering.
Is that -- have you thought about refinancing that? Because you don't need -- I mean, you have a decent balance sheet, and perhaps accelerate your share buyback?
Daniel Rinkenberger
Obviously, that’s a consideration. At this point, I don’t think that a refinancing is necessary.
We have cash that we think is best deployed to pay those down and we’ll still be able to be pursuing what we think is necessary and appropriate for share repurchases as well as growth of the business.
Sal Tharani - Goldman Sachs
Okay. I have a question which I might have asked last quarter also, is that -- Alcoa had in its presentation mentioned that they believe that the aerospace aluminum demand will decline actually at a CAGR 1%, 1.5% over the next three years.
Their view is that as more composite planes comes into play. I was just wondering.
This is not what we heard from you or from others who participate in this market. I'm wondering what your thoughts are in terms of growth of your product in the aerospace over the next few years.
Jack Hockema
We absolutely see steady positive growth in aerospace plate demand as most of our other aerospace applications.
Sal Tharani - Goldman Sachs
What is the growth rate you think will be over the next couple of years, in your opinion.
Jack Hockema
I think you have to go product by product, but off the top of my head, I believe in plate we’re looking and in fact I’m going to go with real demand because who knows what happens with destocking and restocking. But in terms of real demand, content on aircraft or plate consumed to manufacture aircraft, I think we’re looking at around a 3% CAGR on plate order magnitude.
Sal Tharani - Goldman Sachs
3% you mentioned?
Jack Hockema
Yes.
Sal Tharani - Goldman Sachs
Okay, great. And last question on automotive extrusion.
You’ve been, obviously, getting more on new platforms and it has been growing at a pretty steady pace. I was just wondering, should we -- are there other opportunities, other platforms, and this growth rate can be maintained?
Jack Hockema
Yeah, we believe it can be maintained. In fact, our own internal estimates of what we call our served markets, those applications in automotive that we focus on our projection market growth over the next five years is an 8% CAGR.
Sal Tharani - Goldman Sachs
Okay, great. Thank you very much.
Jack Hockema
So we see -- yeah, we see that as a really good opportunity continuing for several years for us.
Sal Tharani - Goldman Sachs
Thank you.
Operator
And we’ll take our next question from Josh Sullivan with Stern, Agee.
Josh Sullivan - Sterne, Agee & Leach
Good afternoon.
Jack Hockema
Hey Josh.
Josh Sullivan - Sterne, Agee & Leach
So with the unplanned outages in the aerospace sheet processing operations, can those lost volumes be made up in future quarters?
Jack Hockema
Unfortunately not. It’s pretty much lost capacity.
Josh Sullivan - Sterne, Agee & Leach
Okay. And then looking at that last question, when we think about that 3% CAGR going forward, and we look at -- I am thinking of the NEO and the MAX and the 777-X and how they have the aluminum fuselages and the carbon fiber wings.
Are you guys more exposed to the fuselage? Is that why you are seeing that growth rate?
Is that a reasonable way to think about it?
Jack Hockema
No, we’re seeing growth rate in builds across the Board. You’ve single aisles as well as twin aisles coming on stream.
We’ve also got the monolithic content. For example, the 787 that replaced a 767, the 787 actually even though it's heavily carbon fiber, actually consumes more aluminum plate for manufacturing than did the 767.
So when people talk about the decline in content, they’re talking the final content -- the flyweight of the aircraft but the buy weight because of the conversions to monolithic design from the traditional design actually increases the amount of plate that’s purchased and that’s why we factor in all of these specific aircraft. We’ve aircraft by aircraft models in terms of plate consumed and what the billed rates will be over the years and that’s what leads to the positive growth rates that I just talked about per plate.
Josh Sullivan - Sterne, Agee & Leach
Okay, thanks and then just one last one. If we look at the Phase 5 expansion, where do you think utilization is in '14, versus in '15 when the market is more fully recovered?
Jack Hockema
Well, it's fairly well utilized this year with a lot of that going into general engineering plate because the service is not only aerospace plate but also general engineering plate, but we’re not at the full potential of Phase 5 or the new casting complex. The combination of those two give us in-factory capacity gains as we continue to modify and improve our practices based on the capabilities of the equipment that we’ve installed.
So we see continuing capacity growth as we go forward.
Josh Sullivan - Sterne, Agee & Leach
Okay. Thank you.
Operator
And we’ll take our next question from Brian Ossenbeck with JPMorgan.
Brian Ossenbeck - JPMorgan
Yeah, hi. Thank you and good morning.
Jack Hockema
Hi Brian.
Daniel Rinkenberger
Hi Brian.
Brian Ossenbeck - JPMorgan
Could you just going into a bit more detail on what actually happened at the aerospace sheet operations that hampered production? Any lesson learned, or anything to take away from that?
Jack Hockema
The sheet operations or the plate operations?
Brian Ossenbeck - JPMorgan
The sheet operations.
Jack Hockema
Yeah, the sheet operations was basically just unexpected downtime on key equipment in that process. The heavy investments that we’ve made at Trentwood over the past five to seven years has been focused on the heat treat plate value stream and we’ve not made those investments.
So we’re working with older equipment in our sheet processing operations and we have some breakdowns. In terms of the $5 million, it was a relatively minor portion of that total cost but still was noteworthy.
Brian Ossenbeck - JPMorgan
Okay. So it sounds like you might have some capital to invest in that area to bring that up to the same level of quality as the rest of the facility.
Or is that not something you are as concerned about.
Jack Hockema
We may or may not. There may be some major maintenance as we go down the road.
This hasn’t been a chronic issue. It just so happened that we had a couple breakdowns combined in that flow stream that impacted us in the quarter.
Brian Ossenbeck - JPMorgan
Okay. So, clearly that was a source of unexpected weakness during this period.
Was there anything else as you look across the businesses that didn't live up to your expectations, that you are expecting to improve as we exit the year and into 2015? Outside of the obvious, with the inventory plate overhang.
Jack Hockema
No it's really actually the business as a whole and frankly Trentwood given all the obstacles and challenges they were working with, in the third quarter we performed pretty well as a business. As Dan said our manufacturing cost performance was strong.
We had the second highest level ever despite third quarter seasonal weakness in plate and extrusions. So we had a pretty strong quarter despite all those issues and despite the $5 million that’s the quantifiable tangible cost, but there was a lot of disruption and resource drain associated with the issues we were dealing with Trentwood as well.
So frankly when we take a step back and look at the quarter other than those challenges that we had was a pretty quarter with the underlying results across the Board.
Brian Ossenbeck - JPMorgan
Right, okay. Switching to automotive, you mentioned the 8% CAGR.
Can you walk through the pace of how that growth might unfold? Is it something you expect to be a little bit bumpier as there is bigger platform adoptions along the way, like we have seen just recently?
Or is it something you will see more gradual as you just get a little piece of a various number of platforms? And are you at the point where you can still just add capacity at the existing facilities?
Or you have to expand beyond that?
Jack Hockema
I am trying to envision that chart in my mind's eye here. And as I recall, it’s a pretty straight line although I think it's more rapid growth in the early part of five year period than it is in the later part of five-year period, but it is pretty steady, because it's not just a couple of big programs.
There are lot of programs on a lot of different platforms that are accommodating the growth that we are seeing here. In terms of capacity expansions, we can do it with existing I’ll call it sites and we've looked out actually through 2025 and at this point it's more back of the envelop than well defined but we have a 10-year plan of expansions that accommodate the market growth and our share growth and existing plans where we will be doing major expansion in three of our extrusions plans, but we believe, we can accommodate it without having a whole new location.
Brian Ossenbeck - JPMorgan
Okay, great. Then just lastly, as you think about some of the sources of inorganic growth, clearly you mentioned the presses and other things you have been doing in automotive.
But more broadly speaking, are there any areas you are particularly interested in, either product type or an end market, or even more broadly speaking a geographical area.
Jack Hockema
Well we continue to have more interest in North America than other parts of the world, but we will certainly go for and if its right kind of fit and creates a path to value creation for our shareholders. And in terms of specific products not really, the most likely places for us to be looking are aerospace and automotive or general engineering type applications, but there are other products that fit our strategic model as well our strategic filter.
So it's not necessarily restricted to precisely what we are doing today, but it has to be compatible with our business model.
Brian Ossenbeck - JPMorgan
Okay. Thank you.
Operator
And we'll take our next question from Tyler Kennian with KeyBanc Capital Markets, Inc.
Phil Gibbs - KeyBanc Capital Markets
Hi this is Phil Gibbs. How are you?
Jack Hockema
Yeah. I thought that sounded like Phil.
Phil Gibbs - KeyBanc Capital Markets
Good morning for where you guys are at. I had a question, Jack, just on the competitive dynamics in the industrial side.
Does the fact that the Midwest premium is being high right now and having some global excess capacity on the industrial side, is that impacting the competitiveness right now relative to imports; seemingly the fact that they may not have to deal with that Midwest premium and so much with the pricing?
Jack Hockema
Well the only place that would impact is would be plate because the other general engineering products are low enough value added that we don’t see really much import competition in those products. Again we've not see a major change either related to currency or related to underlying metal costs in terms of import competition.
Phil Gibbs - KeyBanc Capital Markets
Okay. And as far as the quarter, I think you probably went over it; I am just hopping on now.
I was on another call. But as far as where you expected to be in 4Q, is there anything different there?
Because I think the delta was about $5 million in the third quarter from an EBITDA standpoint and that right now we are looking at flattish, but flattish off of a lower number. Is there anything that you are taking out, or are there costs that are lingering into 4Q?
Or is it more that you are taking some major maintenance to try to balance out the supply/demand picture?
Jack Hockema
Well let me tell a little bit of story there. So what we said in our remarks if you missed it is that the $5 million is what was quantifiable, but there was additional impact from disruption and resources that we allocated from what would be implement the Phase5 benefits of the Phase 5 DC0 in the trouble shooting of the -- some of quality issues that we were dealing with internal issues and the plan.
So it was more than a $5 million impact in the quarter and in the fourth quarter things are pretty much where we expected them to be may be a little bit more challenging, but our forecasts are very similar to what we are looking at three months. For the fourth quarter the biggest impact we think is that we are not as far along in the Phase 5 and the casting complex, implementing those benefits as we otherwise would have been without the challenges that we faced in the third quarter.
Phil Gibbs - KeyBanc Capital Markets
Okay. So it is more or less just integration right now, based on some of the things that you faced and also just the major projects that we have seen that you take on this year.
Is it anything related to the automotive programs? Or is that a separate -- there is really nothing there?
It is mostly just on the aerospace side?
Jack Hockema
The automotive has moved a little bit to the right, but nothing substantial in terms of what our expectation was. Frankly it's more seasonality that we are seeing on specific applications that we have had for a long, long time.
So the fourth quarter is always a wild card, you just don’t know what’s going to happen there as you get unto November and December in terms of production schedules and plant shutdowns and people expecting shipments or not accepting shipments or speeding it up for the first quarter. So it’s a really wild card here in the fourth quarter, but at this point the fourth quarter is not dramatically different from what we thought two or three months ago.
It's really the third quarter where we got caught a little bit here and we are a little bit delayed on capturing the benefits at the pace we expected at Trentwood.
Phil Gibbs - KeyBanc Capital Markets
Okay, and you are expecting aero shipments to be up 4Q relative to 3Q?
Jack Hockema
We'll have seasonal weakness in 4Q, but we are looking at some relatively strong demand strength that pretty much offsets that. So we are looking similar to the third quarter in aero.
Phil Gibbs - KeyBanc Capital Markets
In aero? Okay.
Thanks a lot, Jack.
Operator
And we will take our next question from Tony Rizzuto with Cowen & Co. LLC.
Tony Rizzuto – Cowen & Co
Hi everyone.
Jack Hockema
Hey Tony.
Tony Rizzuto – Cowen & Co
A couple questions here. Hey, how are you guys doing?
Jack, you commented about a dollar pressure and escalation that you have seen in recent months. I was wondering if you could expand a bit further.
Are you referring to direct imports of sheet and plate into the US? And are certain areas maybe being impacted more than others?
That is my first question?
Jack Hockema
No actually I think Tim that was one who commented on that and I indicate we really haven’t seen a change to any extent in terms of the intensity of the import pressure.
Tony Rizzuto – Cowen & Co
Okay. Well, what about -- are you seeing increasing pressures from other materials?
And I am talking about auto specifically, materials like thermoplastics. I see where there is more talk in the industry about going over in some models using thermoplastics in suspensions, etcetera, things like that.
Is that becoming more of an issue as you see in the marketplace?
Jack Hockema
No, I mean those -- some of those things may be very long-term considerations, but nothing that we see in our 10-year timeframe. We see very strong growth in our typical applications as well as body and light applications.
Tony Rizzuto – Cowen & Co
All right, good. In light of all the investments you've made in the strategy at Kalamazoo and KaiserSelect, are you guys positioned to benefit from the burgeoning auto activity that we are seeing take place in Mexico?
Jack Hockema
Yes, but not at Kalamazoo. When the question was asked about our footprint of expansion for automotive, London has been our go-to plant, the one at Ontario plant and we're migrating here in the fourth quarter.
And next year some of the traditional London products the analog brake systems into our Kalamazoo plant, but we're also bringing our Sherman, Texas plant up on automotive applications and its well positioned to service Mexico applications as well as Southwest and Southeast that are another high area of growth. The big areas are regional growth are Northern Mexico and the Southwest and Southeast and then up in the Rust Belt where we have Kalamazoo and London well positioned.
Tony Rizzuto – Cowen & Co
What would be the kind of time frame and chronology? Would it be a matter of having to get qualified, or once you are qualified with a certain OEM that would basically -- that would facilitate that entry?
What would be required and what is the timeline we should be looking for there? It is just a matter of…
Jack Hockema
It's really on a part-by-part basis Tony. So when we book a part, we go through the normal automotive preproduction approval process.
As an extrusion plant -- at Sherman, as an example, and at Kalamazoo we've had to put in a little bit of downstream equipment for the specific automotive applications that we're supplying there. But it's just a matter of going through the process making sure we have the culture in place, the automotive culture, which we're good at doing.
Tony Rizzuto – Cowen & Co
All right, great. All right.
Good stuff. Thanks, Jack.
Operator
And we'll take out next question from Edward Marshall of Sidoti & Co.
Edward Marshall - Sidoti & Co
Just a quick follow-up if I could. With spurts of stocking and destocking, it's caused I guess aerospace value-added revenue per pound to fluctuate and float up and down.
I know this is a pattern that happened 2006 to, I guess, call it 2009; and then we have seen another cycle start. But the rate of value-added revenue per pound looks like it has started to moderate or the decline has stopped almost in the quarter.
First, I want to get your opinion on is that accurate, in your opinion? But secondly, I am curious if we can get the trend line on a longer term.
And that the sin curve floats around, and maybe you can give us an idea of what that ideal price would be if supply was equivalent with demand.
Jack Hockema
Sure. Your question about 2014 any changes up and down that you see in 2014 are really a function of the product mix inside that Aerospace pocket.
Our prices across product lines have been pretty stable throughout the year with some minor exceptions, but overall pretty stable through the entire year. As we move forward and as the destocking or the inventory overhang is fully abated here, we believe we will start to see some relief on pressure on spot prices.
But we don’t expect to know are we building into our plants a significant increase in prices as we go forward. If it happens we'll take it, but we can be very successful whether or not that happens.
Edward Marshall - Sidoti & Co
I guess asked another way, my thought would be at $2.09 value-added revenue per pound in aerospace is probably unsustainable in the long run; and equivalently, $1.81 is probably unsustainable. What do you think the average number should be for that business in a long run, historic?
Jack Hockema
Again, in that bucket, we have products that sell for $2 a pound and we have products that sell for $10 a pound. So a lot of the fluctuation that you see in there will be product mix fluctuations.
And we don’t expect to see significant price appreciation from where we are now. We hope we get some relief as we go forward, but we don’t think it will be a significant step change.
Edward Marshall - Sidoti & Co
And there is no standard mix or anything that you can…
Jack Hockema
No, no it varies month by month and week by week and quarter by quarter.
Edward Marshall - Sidoti & Co
Of course. Okay.
I appreciate it. Thanks, guys
Operator
And there are no further questions in the queue at this time. I’ll turn the call back over to Jack Hockema for closing remarks.
Jack Hockema
Okay, thanks everyone for joining us on the call today and we look forward to updating you on the fourth quarter and full year 2014 and our conference call in February. Thanks.
Operator
And that does conclude today's conference. Thank you for your participation.