Century Aluminum Co (CENX) 2004 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the first quarter 2004 earnings conference call. [OPERATOR INSTRUCTIONS]

I'd now like to turn the conference over to our first speaker today, Mr. David Beckley. Please go ahead.

Good morning. I'm filling in for Al Posti, who normally makes the introduction. He is out of the office today. Welcome to the Century Aluminum conference call, covering our report of earnings for the first quarter of 2004. Before we begin, let me read the following brief disclaimer.

This conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company cautions that such forward-looking statements are not guarantees of future performance, and involve significant risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements, as a result of various factors. With that, let's begin the conference call. Here is Century's Chairman and CEO, Craig Davis.

Thank you, David. I would also welcome you to our first quarter 2004 earnings conference call. We are spread out today in our Century group so that if our questions are sometimes, or our responses, a bit delayed, that will mean we're just sorting it out because some of us are not in the same room.

I'd like to start, as we said in our release, we had very strong first quarter earnings and they're much improved over prior quarter. This reflected the stronger aluminum prices, especially the market after the first part of this year. David will cover the financial results in more detail, including the impact of the accounting treatment on our earnings. Our plants operated very well during the quarter and Jack Gates will cover this in more detail as well.

Our acquisition of Nordural is expected to close in no more than a few days and it might be actually later today or even tomorrow, so it's very close to being completed now. Our results will certainly benefit from acquisition, as well as the positive aluminum environment that we are now experiencing. David, I'd now like to turn it over to you to cover the financial results.

Thank you, Craig. Century reported net income of $4.8 million, or $.20 a share, fully diluted, for the first quarter of 2004. As indicated in the release and in the footnotes, these results include net after tax charges of $6.7 million or $.31 a share, principally for marking to market certain physical delivery contracts and financial instruments that do not qualify for a cash flow hedge account.

Most of the net charge is directly related to the 110 million annual delivery, 170-pound annual delivery contract that we terminated and settled one year ago, in January of 2003. We are required to treat this contract as if it were a financial instrument with associated mark to market account.

As Craig indicated, operating income and cash provided by operating activities were up significantly from the prior year, due to higher price realizations and very good operating performance by each of our facilities. At this point, Jack will talk a little bit more about the operations.

Thank you, David. Overall operations at all three smelters were very good in the first quarter of 2004. Combined metal production exceeded graded capacity by 4.7 million pounds, and over the same period in 2003, by 1.5 million pounds, even after adjusting for the additional day in February and the additional 20% of Hawesville that we acquired in April of 2003.

This improvement was due to higher amperage, improved operating efficiencies, and lower than expected pop failures. The plant's combined production cost for the first quarter 2004 was over a penny a pound over the same period one year ago, due to the additional daily volume, along with the ongoing cost-reduction efforts that are taking place at all three plants.

Safety continues to be a major focus, with one location exceeding one million man hours without experiencing a lost-time accident, and the second location very close to the one million man-hour milestone.

Physical demand for metal was very strong in the early part of the first quarter, with mulch even stronger than January or February. Our major customers report a strong order book, and the Midwest premium reached $.07 a pound, a level not seen in many, many years. The Midwest transaction price increased in March to over $.82 a pound, which is the highest since August, 1995.

Demand for scrap, primarily from China, continues to narrow the spread between scrap and prime. And with this, I'll turn it back over to you, Craig.

OK. Thanks, Jack. Tom, we would now open the call up for questions.

Thank you. [OPERATOR INSTRUCTIONS]. The first question today comes from the line of Bruce Klein, representing Credit Suisse First Boston. Please go ahead.

Hi. Good morning, guys. I couldn't quite reconcile, I think, to the, looking at the prices, your realizations kind of, versus what your kind of operating property EBITA was sequentially versus 4Q, and I'm wondering if I'm missing something. I kind of got to, I think, 12 or 13 line improvement. I think you're up close to 17 or 18, and I'm wondering if I was missing anything or maybe it was just cost and premium or the timing of the hedges.

David, I don't off the top, maybe you'd better try and see if you can answer that.

Bruce, I think it's a couple factors. One is, we are including the other 20% of Hawesville that was not in the numbers last year. And again, as Jack indicated, our cost is down about a penny a pound, due to better operating performance, along with the addition of the 20% of Hawesville. There really is nothing else there.

OK. Was it from, can you just remind us of the hedges then, for '04?

Yeah. In terms of hedges, the pounds that remain to be priced, starting with the beginning of the second quarter, there's 525 million pounds open. That assumes closing an order on May 1. For 2005, it grossed at 725 million pounds, and there are essentially no hedges in place beyond 2005.

So, 725 is open in '05.

Seven twenty five is open to pricing in '05.

And just remind us again the timing of the doubling capacity in Iceland. When is that going to start?

Well, we would commence construction quite soon on that, and the first metal should come out in the first half, first quarter of '06.

OK. And the cost, has it changed from what...?

No. Jack, we haven't had anything that's more recent since my last number, have we?

No changes.

OK.

OK. I'll pass it on. Thanks, guys.

We'll go to the line of Wayne Atwell, representing Morgan Stanley. Please go ahead.

Hello?

Mr. Atwell, your line is open.

Hello? Yeah, I'm sorry. You still there?

Yeah, go ahead.

Sorry. I hit the wrong button. The expansion, has that been approved yet for Nordural?

In what sense? I mean, we have all the permits and so on in Iceland. We have the power, and we've basically presented the project to our board. So, the answer is fundamentally yes.

OK. The last I had heard, there was one or two hurdles to get over, but you say essentially you've gotten over those hurdles?

Yes.

OK. So, it's been completed. You will expand this now?

It's virtually certain. I think Kevin made a final announcement on that, but I would say it's quite certain at this point.

OK. And then can you tell me what the average Midwest premium was in the first quarter versus the fourth quarter?

Oh, boy. Who has that number in front of them?

I have that number. I think it was somewhere around 5.5 cents on an average, but how do you dig that number up?

And do you remember what it would have been in the fourth quarter?

I think it would have been less than five, wouldn't it, Jack?

It was less than five. In fact, I think it was, I don't know. I've got to dig that out.

OK. Why don't you dig that out, and let me pass the questions on to...

Three point eight cents was the fourth quarter Midwest.

What was it, Dave?

It was 3.8 cents.

So, 3.8 and 5.5.

Great. Thank you, very much.

Go ahead, next question.

OK. We'll go to the line of Timothy Hayes with BB&T Capital Markets. Please go ahead.

Thank you. Good morning. I have a question for Jack. The production level that was reached in the first quarter, is that sustainable or is there anything in there that caused production to exceed capacity on a one-time basis?

No, it is sustainable. What we've got is, the plants are all operating better. We solved the mild problem we had with early pop failures, particularly at Mt. Holly. Mt. Holly is up on their higher amperage. The Hawesville plant is on higher amperage. So, no, it is definitely sustainable. In fact, I would anticipate it will even get better.

Go ahead, Tom, with the next question.

We'll go to the line of Michael Churchill with Churchill Research, Inc. Please go ahead.

Hi. I just wanted to ask two brief questions. One, on the last quarter call, you said your view of normal pricing for aluminum was $1,500 to $1,550 a ton. When I heard that, it struck me as kind of low, given the decline in the value of the dollar versus gold and versus foreign currencies. Do you still feel that way? And is that the number that's in your head when you do hedging contracts looking forward?

Well, I think the answer is, we're talking about what is over a long period of time, what we consider to be the average sustainable price. If you look over the last 10 years, $1,500, I think, is about the number. There will be times when it certainly is well above that and there will be times when it is below that, and it tends to be that the view that many have of long-term price in the strong market goes up and that's obvious. And in the weak market, they tend to say the long-term value is down.

I think, probably, if one were to look over the longer period of time in the last 10, 15, 20 years, a $1,500, $1,600 number would be a pretty good number, somewhere in that range, is probably what the statistics would show. I don't think our view of that would be a lot different.

In terms of hedging, what we've said is that we will look to at least achieve what we consider to be the long-term value of metal and that's basically a starting point. And we will look at that alongside of what we feel we need in order to get the returns that we want for the company and sustain positive cash flow and a profit throughout the company in all of the operations and what's going on in the market at the time. So, it's not an exact science. It's a starting point for us.

OK. I also wanted to ask, this may be a dumb question, but the $.78 you put up is the average price for Q1. Is that your realized price or is that, 'cause that strikes me as being very close to what the average was for Comax (ph) Aluminum in Q1. Is this just with no hedges in it or is this your realized price after the hedges? And then the non-operating stuff would be...?

I think the answer is a straight-forward total pounds by revenue, but David, is there anything more subtle than that in there?

No. That's exactly what it is, and obviously some of our pricing of our product shipments are on a month-lag basis, and obviously, our price realizations are influenced by our hedging practices. There's a multitude of factors, but the average price realization for the quarter was $.78 a pound.

So, that's basically after hedges.

Yes, after everything. It's what I...

Including everything, in other words. But what you'll find is, for example, the end of last year, prices were moving up, but most companies, I think, would find their first month of this year, into their first quarter, in other words, of this year, the pricing was based on December usually, and some people have even a bigger lag. Ours is generally a month. So, you will find that impact, as well, in the way the formulas work.

I think when I did my model at the end of last quarter, after the last call, I kind of put what I figured would be the spot price and then the hedges and kind of triangulated between the two. And so, doing that now would get you to something like, I don't know, $.80, $.81.

Craig Davis. Well, today is stronger than it was in the first quarter, if you look at just what's happened over the last month. So, you do have that impact, yeah.

The LOV in the first quarter, three months LOV averaged .756. This is a data point.

OK.

And then if you go back into the last year, it was lower.

OK. Thank you.

OK.

If there are any additional questions or comments, please press star, one.

Nothing further, Tom?

Yes. We do have a question from the line of Alex Litzner (ph) with Merrill Lynch. Please go ahead.

Thank you. I'll spare any more questions to David on the hedge accounting there. I have a question on, have you any more feedback on, I see that Roselle (ph) is a successful bidder for the Kaiser Alpart asset and I was just wondering if you had any more information on the status of Gramercy.

Well, we continue to both monitor the situation and look at it. Nothing has been finalized with respect to the Gramercy situation at this point. They haven't selected their, quote, stocking horse. I believe it will end up in the same basic situation as Alpart did where someone will be selected as a successful bidder and it will still go on to an auction.

We may well be involved in that process, but right now it's moving slowly forward, but nothing final.

So, the acquisition by Roselle (ph) of Alpart doesn't really imply a better strategic position to therefore also supply Gramercy.

Well, I think it's a different situation. Alpart had, I think, especially after this year, next year, a lot more open tonnage in terms of the forward sales. And it's a bit of a different cost structure because the mine and the refinery are in the same place. So, I presume your question relates to the fact that they ended up paying more than the original price.

Right.

And I think it is a different situation. In the case of Gramercy, there are contracts in place that are fairly long term that have been accepted in bankruptcy. And so, how could I put it, a somewhat speculative nature of the current tight market has a very different impact here.

Thanks for that. I was looking at the proposed expansion of Nordural. The alumina for that, how is that working out?

That hasn't been finalized yet. As we've said in the past discussions, there's a distinct possibility that there will be another toll with Billiton. That's still very possible and it would be a very logical step because of the existing pill. The alumina doesn't have to come in until '06, which would be, we think, probably a different market than we're seeing today so that we want to make sure that it all makes the most sense in terms of how we do it.

But I wouldn't rule out the toll, nor would I necessarily rule out a different source of alumina.

OK. Thanks, Craig.

We have a question from the line of Victor Lazarovici with BMO Nesbitt Burns. Please go ahead.

Thanks. I think that's me.

I think so. Go ahead, Victor.

I noted, with some interest, that S&P revised their outlook for you, from negative to stable, following the equity issue, and didn't upgrade your debt rating from double B-. Given the amount of equity you raised and the improving earnings and cash flow, that surprises me somewhat. I thought you'd come out stronger. Do you think their concern is that you're about to launch on an expansion or a purchase, and then expansion, of Nordural.

And in their comment, they also cite that you're looking to acquire Gramercy. Is that a correct interpretation or are you looking at the rating the same way I am?

Well, I guess I'm not very good at predicting, sometimes, how those things come out. In terms of, clearly the balance sheet is stronger for the company today and the cash flow is much stronger. We've always been positive, but it's more so today. I don't know whether Dan or David, do you have any further thoughts on where they came out?

I'd just make a comment, obviously with the expansion, most of that will be debt. So, initially the leverage will slightly increase and I think that all entered into the equation.

Even though your debt ratios have improved so much.

They've improved slightly, Victor, debt to total capitalization. Obviously, our EBITDA to fixed charge coverages has improved dramatically because of the low cost nature of the acquisition. But as we expand, the expansion is roughly, is going to be $300 million, we'll be spending approximately $100 million in this year, 2004, and another $200 million in the following year. And most of that will be debt. So, that's going to add some leverage to the balance sheet.

But I think, weighing everything, there's certainly positive on the company, and I think that probably influenced them in terms of just leaving the rating the same and going to a positive rate, stable.

I think you're right, David. Since we don't have cash generation immediately out of the expansion, there may be a bit of wait and see on that one.

I see. So, would it be fair to say that if you didn't have plans to expand Nordural, you'd probably get a better outcome?

You might.

You might, you might. But if you look at Nordural as it is, and with the expansion, it's something that is very, very powerful. So, we're going to proceed with that, as I said earlier.

OK. And if I could just ask one more question about the Kaiser process. Have they packaged up the Gramercy assets with any of the mining assets? Have they looked for expressions of interest or are they still focused on Alpart?

No, no. They've had, the process on Gramercy has been going on parallel with Alpart, and it does include the mine, the KJBC mine in Jamaica. So, it's a package, which is all part of the Gramercy package, which includes the box site. And it has been moving along, I think a little more slowly than Alpart, but more or less in parallel.

Thanks. I have no other questions.

OK.

There are no other questions in queue at this time.

OK. Well, if there's nothing else, again, we thank you for your continued interest and we certainly would look forward to our discussion at the end of the second quarter. As we see the markets today, they're very positive, and we're quite hopeful that that will continue. Economic situation does seem to be supporting that. In addition, by then we will be well into our situation with Nordural and looking for the benefits that that brings to the company. So, thank you again, and we'll talk in another quarter.

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