Feb 18, 2014
Executives
Melinda C. Ellsworth – Vice President and Treasurer.
Jack A. Hockema – President and Chief Executive Officer Daniel J.
Rinkenberger – Executive Vice President and Chief Financial Officer
Analysts
Edward Marshall – Sidoti & Company, LLC Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc. Philip N.
Gibbs – KeyBanc Capital Markets, Inc.
Operator
Good day, and welcome to the Kaiser Aluminum Fourth Quarter and Full Year 2013 Earnings Conference Call. Today's conference is being recorded.
At this time, I'd like to turn the conference over to Melinda Ellsworth. Please go ahead.
Melinda C. Ellsworth
Thank you. Good afternoon, everyone, and welcome to Kaiser Aluminum's fourth quarter and full year 2013 earnings conference call.
If you've not seen a copy of the 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, Sir Jack Hockema; Executive Vice President and Chief Financial Officer, Dan Rinkenberger; and Vice President and Chief Accounting Officer, Neal West. Before we begin, I'd like to refer you to the first two slides of our presentation and remind you that the statements made by management and the information contained in this presentation that constitute forward-looking statements are based on management's current expectations.
For a summary of specific risk factors that could cause results to differ materially from those expressed in the forward-looking statements, please refer to the company's earnings release and reports filed with the Securities and Exchange Commission, including the company's Annual Report on Form 10-K for the full year ended December 31, 2013. The company undertakes no duty to update any forward-looking statements to conform to the actual results or changes in the company's expectations.
In addition, we've included non-GAAP financial information in our discussion. Reconciliations to the most comparable GAAP financial measures are included in the earnings release and in the appendix of the presentation.
At the conclusion of the company's presentation, we will open the call for questions. I would now like to turn the call over to Jack Hockema.
Jack?
Jack A. Hockema
Thanks, Melinda. Welcome to everyone joining us on the call today.
Looking back on 2013, our value added revenue, adjusted EBITDA and margin were essentially the same year-over-year, following the step change results achieved in 2012. Our aerospace plate shipments in 2013 were a new record.
However as discussed on prior earnings calls, headwinds from an inventory overhang for non-plate aerospace products more than offset the year-over-year increase in aerospace plate. Our record automotive extrusion value added revenue increased 12% year-over-year as we gained content with the launch of new programs and enjoyed an additional boost from a 5% increase in light vehicle builds.
During the year, we continued our investment initiatives to further enhance operating efficiencies, expand capacity and better position our manufacturing platform for further demand growth in aerospace and automotive end market applications. The $45 million Phase 5 project at Trentwood to provide additional plate capacity and improved efficiencies was completed in December and will begin to ramp up in the first quarter.
In addition, a new $35 million casting complex at Trentwood is scheduled for commissioning in the second quarter and will enable a lower cost rolling and improved downstream manufacturing efficiencies. We also initiated approximately $15 million in investments to provide capacity and capability for new automotive programs for crash management systems and various structural applications that are scheduled come on stream in 2014 and 2015.
In addition to continuing to make significant investments in our business, during the year we also continued to return cash totaling more than $100 million to shareholders through quarterly dividends and share repurchases. On our third quarter call I spoke to a number of themes that we’re beginning to shake the business and operating environment for 2014.
Before I discuss those in greater detail, I want to first provide some additional color around issues related specifically to heat treat plate. In a perfect world the relatively linear growth in commercial airframe builds would result in a linear growth trend for our aerospace products.
However, swings in inventory levels throughout the long supply chain can cost a disconnect between real demand and shipments from the mills. The chart on the left side of Slide 6, illustrates our assessment for recent year-to-year changes in the aerospace plate supply chain inventory.
In 2012, the supply chain restocked in anticipation of increasing build rates and in response to aggressive supplier readiness initiatives promoted by the major airframe manufacturers. We estimate that this increased demand on the mills by approximately 5% to 10% compared to what was actually required to support airframe builds.
Despite that build in inventory in 2012, we estimate there was modest restocking again in 2013 as customers fulfilled supply commitments to the mills. Our forecast for 2014 however is that the aerospace plate supply chain will experience a correction with destocking levels similar to the magnitude of the restocking that occurred in 2012.
As we look forward to 2015, how good is our visibility, I’ll answer by reflecting on our view in February 2011 collaborated at the time by other well connected industry observers, that heavy destocking was likely in 2012. As a consequence, we delayed initiating the Phase 4 expansion.
Of course 2012 evolved as we already had discussed and we could have used every bit of the Phase 4 capacity had it been in production. We have indications that there is potential for plate destocking to continue beyond 2014 into 2015.
Our view however is that the level of destocking in 2015 if any, will be modest and there is certainly the possibility that increasing airframe build rates could create sufficient demand pull to bring the total supply chain in to balance by the end of 2014. During prior earnings calls we’ve also commented that the aerospace plate destocking is customer specific, which means that not all mills will experience the same impact.
For Kaiser in 2014, we expect strong aerospace plate shipments with the potential to exceed our record 2013 aerospace plate shipments. However, we also expect to experience competitive price pressure on both aerospace and general engineering plate as some competitor mills pursue non-contract volume by offering low prices in the spot market.
Kaiser’s business model is unique compared to other major aerospace plate suppliers who rely almost exclusively on contract business. We have long standing partner relationships with service centers that in many cases span decades and we sell a substantial portion of our portfolio of aerospace and general engineering products to our service center partners.
The right hand side of Slide 6 illustrates the non-contract or spot pricing of our plate products. Virtually all of our general engineering plate is sold through service centers and is priced on a non-contract or a spot price basis and a portion of our aerospace plate is sold on a similar basis.
During periods of strong demand and/or restocking as we experienced in 2012 and 2013, this can create a positive tailwind for the business and during periods of weak demand and/or supply chain destocking as we experienced in 2010 and 2011 and expect again in 2014 our non-contract business is susceptible to competitive price pressure. So what does this mean for Kaiser in 2014?
Despite the anticipated destocking, we continue to expect a modest year-over-year increase in our aerospace plate shipments. Inventory overhang on non-plate aerospace products however is beginning to abate although there are still some customer specific issues on certain non-plate products.
For automotive extrusions, we expect another record year as build rates are expected to be up approximately 4% year-over-year and our content for vehicle continues to grow. As discussed in my earlier comments, we expect competitive pricing pressure on our plate products.
However we anticipate that the combined net impact of sales price, sales volume and sales mix in 2014 will be similar to 2013. On the cost side of the equation we expect a tale of two house.
In the first half of 2014, we expect to experience continuing inefficiencies related to the installation and subsequent ramp-up of Trentwood’s new casting complex, as well as the ramp-up cost in preparation for the launch of several new automotive programs in the second half of the year. In addition, in contrast to recent history, our planned major maintenance spending in 2014 is expected to be more heavily weighted towards the first half of the year rather than the typical pattern of being weighted to the second half of the year.
While we expect inefficiencies early in the year, we expect improving manufacturing efficiencies during the year following our investments in Phase 5 and the new casting complex at Trentwood and as the new automotive programs begin production in the third and fourth quarters. Overall with the mixture of headwinds and tailwinds, we anticipate that 2014 value added revenue and adjusted EBITDA results will be similar to 2012 and 2013.
As we look to 2015 and beyond, solid fundamentals remain in place and we see the potential for strong top line and bottom-line growth. We expect that the aerospace supply chain inventories will stabilize and we will again experience demand for our aerospace products in proportion to the robust build rates for airframes.
We also anticipate continued automotive demand to drive growth and we expect strong momentum to capture improved manufacturing efficiencies from our investments at Trentwood. Reflecting on our confidence in the future, our board has increased the regular quarterly dividend by 17% to $0.35 per share and has authorized an additional $75 million for future share repurchases.
On that note, I’ll turn the call over to Dan for further discussion of 2013 results and then I’ll provide some additional granularity and color regarding our short-term outlook. Dan?
Daniel J. Rinkenberger
Thanks Jack. As Jack mentioned, our 2013 value added revenue, adjusted EBITDA and EBITDA margin were in line with the step change results that we achieved in 2012.
Value added revenue for aerospace and high strength applications was essentially the same as the prior year reflecting record aerospace plate shipments offset by the negative impact of an inventory overhang for non-plate aerospace products that continued through the year. Value added revenue for automotive extrusions grew 12% to another annual record in 2013, as we launched several new automotive programs in the second half of the year.
In 2014, we plan to launch additional programs driven by further aluminum extrusion content increases. Value added revenue for our general engineering products declined 3% in part due to temporary throughput disruptions that limited our general engineering plate shipments in the last half of the year.
Adjusted EBITDA was $174 million and EBITDA margin was 23.7% comparable to the record results of 2012. Included in 2013 results was a $4.5 million customer payment in lieu of taking contractual minimum volumes that we received early in the year.
2013 also reflected the impact of temporary manufacturing inefficiencies in the second half of the year as construction disruptions related to our two major capital programs at Trentwood as well as throughput for plate and drove manufacturing costs higher. On Slide 12, we show other key – pardon me Slide 10, we show other key consolidated financial metrics.
As reported, consolidated operating income was $173 million for 2013, adjusted for $27 million of non-run rate gains, the largest of which was approximately $22 million of a non-cash gain related to the VEBAs. Consolidated operating income was $146 million, which compared to $147 million the prior year.
The $1 million decline from 2012 reflected slightly higher depreciation expense. Reported net income for the year was $105 million or earning per diluted share of $5.44.
Adjusting for non-run rate items as well as favorable settlements and adjustments affecting our tax reserves, 2013 net income was $70 million or adjusted earnings per diluted share of $3.65. This compares to adjusted net income of $74 million or adjusted earnings per diluted share of $3.82 in 2012.
The year-over-year decline was primarily related to a full year of interest expense on the senior notes that we issued in May 2012. Our effective tax rate of 27% for 2013 reflects favorable settlements and adjustments affecting our tax reserves that I previously mentioned.
At the end of 2013, our net operating loss carry forwards totaled $737 million. As we apply these net operating loss carry forwards, our cash tax rate remains in the low single-digits.
Commenting briefly on the fourth quarter of 2013, adjusted consolidated operating income improved slightly over the third quarter and improved $6 million over the prior year quarter, primarily reflecting the impact of improved sales over the prior year. Slide 11, shows the strong cash generation of our business.
Our adjusted EBITDA of $174 million was more than enough to fund our cash requirements for operating and investment activities as well as debt service. We paid the annual maximum of $20 million to the two VEBAs last year.
And as a result of our strong earnings and cash flow in 2013, we will make another annual variable contribution to the VEBAs of $16 million in the first quarter of this year. Our sizeable capital spending of $70 million in 2013, funded important growth initiatives including the casting complex at Trentwood, which will yield cost reduction in the second half of the year.
Phase 5 plate capacity expansion at Trentwood and various investments to enable growth in automotive extrusion programs. In addition to the significant capital investment programs, during 2013 we’ve returned over $100 million to our shareholders through quarterly dividends and share repurchases.
As we maintained financial flexibility and generate strong cash flows from our business, we will continue to deploy cash in a balanced and prudent manner by investing in attractive projects for long-term value creation, reserving liquidity and cash for our $175 million debt maturity in early 2015 and returning excess cash to our shareholders through share repurchases and dividends. And now Jack will discuss current industry trends and our outlook.
Jack?
Jack A. Hockema
Thanks Dan. Turning to Slide 12, Boeing and Airbus had record airframe builds and record net new orders in 2013 driving the backlog to an all-time high.
The large backlog continues to provide the impetus for increasing built rates and supports our long-term optimism for these applications. On Slide 13, we expect that our first half 2014 value added revenue for aerospace and high-strength applications will be similar sequentially to the second half 2013 pace with solid aerospace plate volume, slowly improving non-plate aerospace demand with some offset from the competitive price pressure on plate products.
Slide 14 has our automotive outlook. We expected North American builds will increase approximately 4% to 16.8 million vehicles in 2014 and we expect that our first half value added revenue for these applications will increase sequentially from the record second half of 2013 level.
We have numerous product launches in progress for crash management systems and various structural applications and we anticipate that our content for vehicle will continue to grow as these new programs are scheduled to come on stream later this year. Slide 15 addresses our outlook for general engineering applications.
We anticipate modestly stronger general engineering demand and shipments in 2014, although we expect the competitive pricing pressure on general engineering plate will offset some of the benefit from increased volume. Summarizing our outlook for the first half of 2014 on Slide 16, we expected value added revenue will show sequential growth from the second half 2013 pace and we anticipate that the net effect of sales volume, sales mix and sales price will be similar sequentially to the second half of 2013.
As mentioned in my earlier comments in the first half of 2014, we expect to experience continuing inefficiencies related to the installation and subsequent ramp-up of Trentwood’s new casting complex as well as ramp-up cost in preparation for the launch of several new automotive programs. In addition, in contrast to recent history our planned major maintenance spending in 2014 is expected to be more heavily weighted towards the first half of the year rather than the typical pattern of being weighted towards the second half of the year.
As a result of these higher cost and inefficiencies, we expect that the first half adjusted EBITDA will be weaker sequentially than the second half of 2013 and we anticipate that the first quarter in particular will exhibit adjusted EBITDA below the second half 2013 run rate. Summarizing our remarks today, despite some headwinds our 2013 results essentially replicated the step changed results achieved in 2012.
We continue to make significant investments in our business during the year while also returning more than $100 million of cash to shareholders through quarterly dividends and share repurchases. In 2014, we expect destocking headwinds in the plate market will be offset by tailwinds from continuing growth in automotive demand and content and slowly improving non-plate aerospace market conditions.
We remain bullish about Kaiser‘s long-term future and our ability to drive shareholder value. Looking beyond 2014 we expect growth from the strong base established in 2012 through 2014 as the aerospace supply chain inventory overhang abates and we again realize the full benefits from strong secular growth fundamentals for our aerospace and automotive applications.
In addition, we expect to realize growing benefits from our previous investments in capacity, quality and efficiency. We will now open the call for questions.
Operator
Thank you. (Operator Instructions) And our first question will come from Edward Marshall with Sidoti & Company.
Edward Marshall – Sidoti & Company, LLC
Good afternoon or good morning.
Jack A. Hockema
Hi, Ed.
Daniel J. Rinkenberger
Hi, Ed.
Edward Marshall – Sidoti & Company, LLC
So the first question I had was looking at I guess the chart that you have on Page 6, and I guess it’s little bit harder to kind of talk about where or pinpoint where spot pricing will be 2014. But will you take a look at maybe the aerospace plate in the 75% and give or take under contract.
First, I am curious has that price reset to the lower standard yet; and secondly, how much of that 75% under contract is coming up for say new pricing negotiations in 2014?
Jack A. Hockema
I think we may have said on the last call or maybe a call prior to that, but we basically have reset our entire book of contract business over the past couple of years. And I have expressed before and I’ll express it again here that we are very pleased with a very strong, robust, book of contract business which frankly in part explains our expectation even with some destocking in the industry supply chain this year.
We expect 2014 shipments are probably going to be equal to or greater than our record 2013 shipments. In terms of pricing, we are very happy with the pricing, but I will make one caveat related to the contract pricing.
I’ll go back to the first quarter of last year, some of you may not remember but there was a big spike in the first quarter because we received a $4.5 million penalty payment from a customer who didn’t meet their volume commitments to us. And we’ve had similar characteristics throughout the past several years, especially the 2010-2011 period where people were below or were relatively low in terms of demand relative to some of the contracts.
And if you analyze that whole situation, our situation going forward, we expect that we are going to have very strong demand and that will have people meeting their commitments and their requirements. So while we don’t see inner pricing changing that much, the apparent price maybe different because prior periods had penalty payments spread over some lower volumes.
So what does all that mean? If I bring it back and you put the whole package together, spot pricing and contract pricing for plate – recall that when we made the big jump in EBITDA or the step change as we’ve characterized it from 2011 to 2012 and our margin went from roughly 17% to 23%, we said that 6% jump was roughly a third price or third leverage and a third cost efficiencies.
In our current view and again this is a very dynamic competitive environment out there but our current view of 2014 is that we’re going to see pricing levels on plate similar to what we saw in 2010 and 2011. And that said, 2010 and 2011 included some premium prices related to the low volumes that we had in that period of time.
So putting this all into perspective there certainly is nothing that we haven’t seeing before. I mean you go back to 2010 and 2011 weak market, destocking, we saw some price pressure; 2012, 2013 restocking, a much strong demand environment and we saw better pricing.
So this was kind of a normal phase that we go through in the industry. Do we like it?
Do we like these ups and downs? No, we’d like that nice, linear growth pattern like we have in build rates, but that’s not the way this industry works.
It’s a very long supply chain and we see these swings in inventory and it reflects volume and it affects pricing through the supply chain. Long answer but did I get to your point there, Ed?
Edward Marshall – Sidoti & Company, LLC
Sure, sure. I just want to be clear on something that you said.
The step change that you saw, the third that came from pricing, you are not suggesting that this year you are giving that third from pricing back. Is that what you are saying?
I don’t think you are, but I just want to be clear on that.
Jack A. Hockema
Yes, the prices this year will not be as good as our prices last year. So when we look at this year now the competitive pressure on plate prices could represent one to two points of margin on the total value added revenue compared to where we were in 2012, our 2013.
But again I’ll come back and say I said it three or four times in my prepared remarks, when we look at the total package of sales price, sales volume and sales mix, i.e. the contribution of our sales to the bottom line this year we expect this is going to be pretty much similar to where we were in 2012 and 2013.
So while there is some price degradation, we believe we’ll have volume and mix that essentially makeup for that and puts us from a sales standpoint relatively neutral to where we’ve been in the past couple of year.
Edward Marshall – Sidoti & Company, LLC
I see. And then if I look at maybe as we bring Trentwood Phase 5 on board and as well as for casting, I’m curious if you kind of talk to utilization and where you would be at that point considering.
And I do, you did mention that you anticipate volumes were up, but where do you see your utilization kind of panning out say at the end of 2014?
Jack A. Hockema
Yes, I think we’ve said consistently even going back to when we announced Phase 5, that Phase 5 was really a combination of what previously had been phases 5 and 6. And so we were brining on more capacity even then really thought would be required in 2014 because Phase 6 had some important efficiencies that we wanted to capture and to improve the capital efficiency of the entire project to combine that two.
So we’ve not expected that we would have full utilization of that Phase 5 capacity in 2014, and at this stage we don’t expect that either.
Edward Marshall – Sidoti & Company, LLC
How about 2015? Do you anticipate doing that in 2015 or is it just too early to tell?
Jack A. Hockema
Yes, it’s way too early, I mean it goes back to I know I’ve talked a long time in my prepared remarks. But I went back to 2011 and I’ll just repeat that.
We sat at exactly this time three years ago in 2011 contemplating whether we should pull the trigger on Phase 4. And at that point we were expecting pretty significant destocking in 2012, as well as potential for destocking going into the 2013.
And we didn’t pull the trigger on Phase 4 until September, didn’t get it completed until late 2012 and instead of destocking in 2012, we ended up with restocking in 2012, and we could have sold every pound that we would have produced with Phase 4 had we pulled the trigger earlier. So sitting here a year ahead of time, I mean 2011 to 2012 is just an indicator.
While we’ve got some pressings [ph] out there, customer pressings telling us that they are expecting destocking, minor destocking, but destocking in 2015. It’s way too soon to tell what the entire landscape will look like.
I mean we could be back into restocking even though one or two customers could be destocking next year. So, we were optimistic that 2015 demand is going to be much better than 2014, but how much better is still a crab shoot, so to speak
Edward Marshall – Sidoti & Company, LLC
Okay, thanks very much.
Operator
And next question comes from Steve Levenson with Stifel.
Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Thanks, good day everybody. I guess the easiest way to say it.
Just a question in terms of the long-term contracts and the pricing. Can customers substitute spot business for commitments state otherwise made under contracts or are they looking for renegotiations of any amount?
Jack A. Hockema
Let me just go back to what happened in 2010 and 2011. We said during that period I don’t know if you’re recovering as a time Steve, but we did enforce all of our contract provisions.
So we are without getting into any specifics, I will just say we are very pleased with what is a very robust long-term book of business going forward.
Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Got it, that ones…
Jack A. Hockema
[indiscernible] with what we have.
Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Okay, that's helpful, because I didn't cover the company back then. Are there any additional details you can go into, I know you can't name them, but you talked about customer specific situations in terms of the destocking?
Jack A. Hockema
Yes, I am not going to talk about individual customers, we'll let them speak for themselves. But what we’re seeing in plate in particular is that most of this destocking pattern is really in one major supply chain, the red part of the supply chain, there are other parts that are not destocking in fact that may even be restocking as we go through this.
So the situation we’re seeing here is really just one segment of the supply chain that has gotten out of wack. I also said customer specific in the prepared remarks as they’re related to non-plate inventory.
And while for the past year, we've been saying that that has been general, it’s been multiple products and it has been throughout the entire supply chain. We are starting to see that sporadically improve.
So now it’s more customer specific, where some products and some customers are getting back to normal or steady pool and in other customer specific areas we haven’t seen it return to more normal demand patterns.
Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Okay, that’s helpful. Thanks a lot.
One last one, the automotive market has been working out great. Is there a holy grail you’re looking at that would provide more content in a chunk than the incremental increases you’re currently seeing, for example like the Ford F-150 going through a very much increased aluminum content?
Jack A. Hockema
Yes, well, again we don’t speak to customer specifics. All I’ll say is first of all without the F-150 we had a pretty good step change in the second half of last year, if you look at those trends.
And all I will say about our plans going forward is that we are the number one supplier of demanding automotive extrusion applications in the industry. And so as industry demand grows we certainly expect that we are going to grow at least at the rate that industry demand grows and probably we think grow faster than industry demand grow.
Stephen E. Levenson – Stifel, Nicolaus & Co., Inc.
Got it. Thank you very much.
Operator
(Operator Instructions) And this question comes from Josh Sullivan with Sterne, Agee.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc.
Good afternoon, Jack, Dan.
Jack A. Hockema
Hey Josh.
Daniel J. Rinkenberger
Hi.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc.
So on the previous aerospace cycles you guys have noted the lumpiness on the growth platforms as the OEM stock up. Hovering the current cycle, if I look at the two largest commercial air frames it appears they might be exacerbating the overhang.
And I guess my question is, the 747-8 and A-380 are settling in a current rates, speaking in generalities. Historically how long does it take the supply chain to absorb a rate reduction or are you saying that we’re kind of already through that.
Jack A. Hockema
Well, there are so many factors that can cause these things, it’s virtually impossible. I’ll go back to the anecdote I just used in answer two at Ed Marshalls situation.
I mean, we’ve got lot of other industry observers that are very close to the situation as well. We all felt in early 2011 that we were probably going to see heavy destocking in 2012.
And these were the most knowledgeable people in the industry and in fact we saw heavy restocking in 2012. So there are just so many variables and so many customers involved.
We get a much better appreciation in plate because the two big guys do have a much better handle on the supply chain in plate than the other products that are – where it’s really fragmented in terms of the supply, but even in plate there are no precincts out there and things change in the 12 month period as well. It’s very difficult to be precise in terms of how these things last.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc.
Okay. And then I mean what do you think the cadence of the pricing pressure looks like throughout the year?
I mean is it got stronger or as your volumes increase kind of as your guidance says, how are you guys looking at that?
Jack A. Hockema
No, we don’t think so. We think this played overhang is a full year 2014 issue.
And as long as that played overhang is there, we’re probably going to have these issues facing us.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc.
Okay, because general engineering, I mean the price for this last quarter, the pricing actually is much better, it’s like the volumes were off. I mean is there anything in particular to that market?
Jack A. Hockema
Well, on the last call we said we didn’t think that the price pressure would hit until 2014. So we expected we were going to have “normal prices” in the fourth quarter and we did.
From a volume standpoint, general engineering almost always is very weak volume in the fourth quarter that is just a normal seasonality of demand.
Josh Ward Sullivan – Sterne, Agee & Leach, Inc.
Okay, thanks. I’ll jump back in the queue.
Operator
And the next question comes from Phil Gibbs with KeyBanc.
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
Thanks for taken my call. How are you?
Jack A. Hockema
Hi Phil, good.
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
Good, the headwind that you point out from the investments Jack in Trentwood and then also some of the automotive programs, is there any way to quantify that on an incremental basis versus the fourth quarter and what should we be and what we’re looking for here?
Jack A. Hockema
I knew you were going to ask me this, Phil. There are a couple of factors going on half-to-half.
The first one is major maintenance, which I talked about and you’ve been following us long enough, you know that typically we have a pretty significant shift in our major maintenance spending in this – higher spending in the second half compared to the first half. This year currently and these things are always subject to change but right now, our planning cycle we’re anticipating that a typical second half level of spending in the first half and a lower level of spending in the second half, which maybe the first time I’ve seen that since I’ve been here in the last 15 years or 20 years.
It may have happened, but I don’t remember it happening before. So a big part of cost change, first half to second half, frankly is going to be the major maintenances.
And then the second part is the manufacturing efficiencies which are primarily Trentwood related to the construction and we talked in the third quarter call last year that we got hammered pretty hard in the third quarter with inefficiencies and that continued in the fourth quarter, and at this point it certainly continued in January and we expect this is going to continue in the first quarter and into the second quarter in terms of the construction interruption there. And then we started to button up the casting complex in the second quarter and ramp it up so the construction interference will be out of the way and then we start ramping-up casting as well as being into the ramp-up of Phase 5, so we expect the efficiencies are going to improve as the year goes on.
And how to quantify that is, I mean we’ve got our forecast obviously, but it will be what it will be in terms of the timing and the improvements that we make. And the third factor that we have that’s affecting us here in the first half, we do expect some fairly significant ramp-ups in terms of new products on automotive models and we are doing that in some plants that haven’t had that much automotive business in the past and so we’ve had to add a lot of resources and lot of cost here in the second quarter in some of our automotive plants getting ready for what our planned significant increasing in volume in the third and then into the fourth quarter of the year.
So we’ve got a lot of things happening here in the first half that we hope we’re going to remediate in the second half. And I know that doesn’t give you the granularity that you are looking for.
But we are looking in the first half probably at EBITDA’s, high 30’s, low-40s and I think we were 41 or 42 pace in the second half of last year 42 I think. So somewhat lower than that 42 and we think the first quarter is going to be worse than the second quarter in terms of how that looks.
So, we’re expecting a pretty rough first quarter and not as rough second quarter. And then we think the second half if everything works out the way it looks to us today then we should really start to see some strong improvement in the second half.
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
That makes a lot of sense. You’ve essentially got major maintenance as per usual in the second half of 2013 and as per not usual or on seasonally you have that continuing into the first half of next year and then on top of that you got the investments.
So when we get into the second half of next year we could think about the maintenance coming off and then the investments or efficiencies starting to come through?
Jack A. Hockema
Exactly, you got it.
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
Okay. That makes a lot of sense.
And I understand why it was difficult to go through that. So I appreciate it.
The premiums, the spike that we’ve seen in the last, I don’t know 45 days, 60 days, how does that impact your business Jack?
Jack A. Hockema
You’re talking about the Midwest premium?
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
Yes.
Jack A. Hockema
As you know, we pass through the Midwest price on most of our business other than high value added products. It hasn’t moved enough that it’s that significant of an issue on our high value added products if it moves $0.20 or so like it did back in I think the 2010-2011 timeframe, that confide us with a little bit of lag.
But we have anything approaching that, we’re still sitting it metal prices now Midwest prices similar where we were early last year. So, it hasn’t hammered us yet and we don’t think it will, but you never know with metal prices.
Philip N. Gibbs – KeyBanc Capital Markets, Inc.
Okay, I appreciate that. Thank you.
Operator
And at this time there are no further questions. I’ll now turn the conference back over to you for any additional remarks.
Jack A. Hockema
Okay, thanks everyone for joining us on the call and we look forward to updating you again during our first quarter call in April. Thank you.
Operator
Thank you. And that does conclude today’s conference, with then thank you for your participation today.