Century Aluminum Co (CENX) 2004 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Century Aluminum second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Director of Communications, Mr. Al Posti. Please go ahead, sir.

Good morning everyone. Welcome to the Century Aluminum conference call covering our report of earnings for the second quarter of 2004. Before we begin, let me read the following disclaimer. This conference may include forward-looking statements within the meaning of U.S. federal securities laws. Century has based its forward-looking statements on current expectations and projections about the future. However, these statements are subject to risks, uncertainties and assumptions, any of which could cause Century's actual results to differ materially from those expressed in its forward-looking statements. More information about these risks, uncertainties and assumptions can be found in the risk factors and forward-looking statements and cautionary language contained in Century's filings with the Securities and Exchange Commission. Century does not undertake and specifically disclaims any obligation to revise any forward-looking statements to reflect the occurrence of anticipated or unanticipated events or circumstances after the date such forward-looking statements are made. With that, let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Al. I would like to add my welcome to the second quarter 2004 earnings conference call. We have most of our team in Monterrey today. Jack Gates is in Hawesville, and he will join us from there.

As we noted in our press release, we achieved record operating earnings in the quarter. We also achieved very strong cash flow. During the quarter, we completed the Nordural acquisition. This is a very positive step for the Company. We have already begun an expansion at Nordural which will double the capacity to 180,000 metric tons per annum. Startup of this expansion is scheduled to occur during the first quarter of 2006.

We certainly have benefited from strong aluminum pricing in the quarter. It is important to note that the L&E and IAI inventories have been dropping dramatically since the beginning of this year. Based on the information we have, total inventory today is just in excess of 40 days, which is quite low by historic standards. While we were very pleased with the overall performance of the Company in the quarter, it could have and should have been better. Our average realized price increased approximately 4 cents a pound over the first quarter. We did not bring all of this improvement to the bottom line as a result of certain cost increases in the operations. We're addressing these issues now. David Beckley and Jack Gates will discuss this in more detail. I would now like to turn the conference over to David Beckley, who will cover the financial results, after which Jack Gates will review the operations and then we will open the call for questions. David?

Thank you, Craig. As indicated in the release, Century Aluminum reported net income of 18.3 million, or 60 cents a common share fully diluted. And as Craig Davis indicated, our results benefited from the very strong market and the addition of Nordural from the date of closing, April 27, 2004. We did have some cost increases in our domestic plants compared to the first quarter. Excluding alumina, cost of sales increased by about $4 to $5 million pretax versus the first quarter of 2004. 1.2 million of the increase was due to onetime actuarial adjustments to our pension and post-retirement medical liabilities. The other items were operational nature, and Jack Gates will comment on them in his remarks. Our goal for the rest of 2004 will be to come closer to the cost levels that we achieved in the first quarter.

On a positive note, we generated significant cash flow from operating activities during the first six months of 2004, almost $52 million. This compares to $50 million last year, but last year included 35.5 million of cash generated from the termination settlement of the 110 pound per year contract with Glencore. I will conclude my remarks by giving you an update on alumina purchases from Kaiser Gramercy and on our hedge to position. The alumina for our Hawesville plant in Kentucky has been supplied by Kaiser Gramercy. The pricing has been on a percentage of L&E basis. Assuming that we close on the acquisition of Gramercy on September 1st, '04, along with our partner Noranda, we will be supplying alumina to Hawesville at cost, rather than as a percentage of the L&E. This will reduce our alumina natural hedge percentage to about 13 percent versus 25 percent before this change. As a result, effectively, our open position increases.

As of July 1, 2004, 52 percent of our second half capacity in 2004 was open. That means that 52 percent of our second half production has not yet been priced or hedged by our percentage L&E alumina supply contracts. For the year 2005, 64 percent of our capacity is open and for 2006, we essentially have no forward selling and we're hedged by our alumina supply contracts. We have done no forward selling during this past quarter. The only change in our position is the addition of Nordural on April 27 and the assumption that we will purchase alumina at cost from Gramercy versus a percent of the L&E effective the September 1. Jack Gates will now give you an update on operations.

Thank you, David. Our operations slipped slightly in the second quarter of the year as compared to the record first quarter that we had. Molted metal production was down 2.9 million pounds compared to the first quarter, but better than the first quarter of last year by 600,000 pounds, excluding Nordural. The decrease as compared to the first quarter's call was primarily by fewer operating pots and a slight decrease in operating efficiency at all three smelters. The reduction in operating pots was due to an increase in cells taken out of operation and the recent failure of a piece of electrical equipment requiring the Ravenswood smelter to operate four cells short until this equipment is repaired. For the complete year, however, the number of pots removed from service and realigned is still less than forecast.

As Craig mentioned, the Nordural smelter continues to operate well, producing world-class production and efficiency numbers. The expansion to double the plant's capacity to 180,000 metric tons per year continues on schedule with completion, as Craig mentioned, early 2006 and full operation by midyear 2006. Production costs were up in the first quarter, driven primarily by the reduced metal production, increased energy cost and the increase the number of pots relined. We expect to show in improvement in all of these areas in this third quarter. The market continues strong in almost every sector. The only area we're not experiencing strong demand is the wheel market, due largely to imported foundry ingot. The spread between scrap and prime appears to be returning to normal with exports to China diminishing. Midwest transaction price rebounded in June to 83.22 cents per pound and appears directly related to the weaker U.S. dollar and declining L&E inventory levels, which today hit 872,575 pounds and it continues to drop daily. Today's L&E price is about the same, about 83.2. The Midwest premium continues at the 7 cent per pound level. I will turn back over to you, Craig.

Thank you, Jack. We now open the call to call for questions.

(Operator Instructions). Bruce Klein, Credit Suisse First Boston.

I was wondering, on the Nordural acquisition, if things are performing I guess as you expected, better than you expected? And also, if it was a normal level of shipments for the -- I guess roughly two months or so of the quarter?

I will answer part of it and let Jack take part of it. This is Craig. I think it's everything we expected, perhaps somewhat better, in terms of the relationship with the people in the operation itself and in Iceland, a very positive environment, very positive business environment. We have started the expansion very, very rapidly and as we've had planned. And I thank from an overall operating standpoint, it is also going quite well. Jack, you may want to add something to that side.

Yes, Craig. The plant is still running very, very well. It is producing, as I said, world-class production and efficiency numbers. We did take a couple of extra cells out for relining. We'll do that for this month also, then get back on a regular schedule. Then for the year, we will be a forecast. But the plan is running exceptionally well.

Was there some reference -- I thought -- there was surcharge in South Carolina also that impacted costs?

The power cost -- there was some increase in power, yes.

I think -- did it happen last year? When was last time that occurred? I don't remember if there was anything in the first quarter?

We have a fuel escalation clause in our contract at Mt. Holly, and it did occur several times last year. And going forward, it will occasionally occur when something happens to Santee Cooper, their cost goes up, they pass those costs onto us.

Was that a meaningful number for the quarter?

It was -- let me see if the number -- it was not a huge number.

Lastly on the cost line, I was not clear -- you guys spoke a little quick for me on the -- it sounds like you were running fewer pots than you had planned. I wasn't clear whether some of the sales were down for repair or whether there was some inefficiencies that caused some of the downtime. I wasn't clear which it was.

A number of cells were down for repair. We had -- it works in cycles, Bruce. We had an excellent first quarter. We had very few pot failures. IN the second quarter, we had a few more pots failures than the first quarter. As I said, for year-to-date, we're right on forecast. But when we take a cell out, it either fails, for we take it out for efficiency purposes but most of them go out for failure.

But year-to-date, you are kind of --

Year-to-date as far as failure and relining, we're right on forecast.

Okay, I will go back in queue. Thanks, guys.

(Operator Instructions) Victor Lazarovici, BMO Nesbitt Burns.

A couple of questions. I guess first of all, I should congratulate you, Craig. We've been listening to conference calls for a couple of weeks and costs have been rising pretty much across the board and you're the first CEO who actually said you didn't deliver the number you should have. Everyone else is pretty happy with the benefit of metal prices.

Well, we're happy with it, but we should've brought more to the bottom line and we're working on that.

That's the question. Other than getting these cells at Ravenswood back online, I'm not quite sure what else you're going to do to get your costs back to the 60, 61 cent level you had in the first quarter?

And Jack can jump in, but first of all, remember that one of this was a onetime charge. A good chunk of it was a onetime charge based on the OPEP accrual, and so that will not recur. I think we have one other item in there which is also not recurring. And then we did have some operating efficiencies which we are addressing and some issues with coke supply, which is certainly a universal problem today which we are addressing. And Jack, you may want to expand on this a little bit, how we're going to bring this back to where we think it should be.

Well, you're right, Craig. One of the issues, and it is an excuse but it is a real issue -- one of our major raw materials is calcined coke. And with the crude oil industry today around the world, the quality of coke into every smelter in the world has gone down. We experienced some of this in May and June. We're meeting with our supplier as we speak and we are working -- we brought in some additional coke from a different supplier, we're learning to use the coke that is coming down. But the quality of coke into the smelters, all the smelters around the world, has really gone down in the last few months. We're working our way through that and we're coming out of it right now. So what we will do basically is we will improve the anode, our efficiencies will go back, we will get our cells back and we will make more metal. And that will basically be a big piece in taking our cost back down.

I think the other point, Jack, is that we have sort of a forecast of what we think pot failures will be during a year. And in the second quarter, they were above sort of the average which impacted our results. But it doesn't come out perfectly day by day or by month or by quarter, so that what we're seeing now is those pot failures are actually probably dropping a little bit below. So it's the average that's important and the average number of pots we're running over the years that's important and we see that coming back to where we had originally forecasted it to be. Is that not correct?

That's correct. In fact, we're already back in Kentucky. We're already back in excess of what we had forecast. We're not quite back in West Virginia, but we will be back shortly.

Hopefully, Victor, that helps.

That does. I have a question on the Gramercy impact. Gramercy's position on cost curve is pretty high and your contract as a percentage of metal allowed you to buy the facility and its supporting mine at a fairly low price. With metal prices where they are now, I suspect you're going to get a cost benefit for the foreseeable future. But longer-term, presumably, the difference between transferring alumina as a percentage of metal or the percentage of cost is de minimus? Is that a correct assumption?

It may be. Let me spend a little bit on the Gramercy situation. We have all along I think been explained why we were looking at this. And to reiterate for those of you who may be weren't on prior calls, our view of Gramercy was, first of all, we had a very secure supply of alumina coming into the Hawesville operation and we were most concerned that we maintained the security of that supply at reasonable cost levels. We were concerned that somebody would step into that situation that really could not operate it or would for whatever reason might not honor our contracts in today's market.

What we did not want is to find the Company in the situation of moving into purchasing alumina in a volatile spot market. So that we, together with Noranda as really a 100 percent consumer of the metallurgical grade alumina from that operation decided we would step in and buy it.

In terms of the operation itself, the alumina refinery is in very good condition. As you all know, it had an accident there a few years back and they put a lot of money in bringing it up to grade. Overall, the operation, including the bauxite mine, bauxite coming in from Jamaica, is at the higher end of the cost curve. We did not step into this on the assumption that we were going to make it a lot better or turn it into, let's say, a world-class, very low-cost producer. We do feel that there is some potential upside there, but we really have to get into the operation and see where it is before we would try to make any predictions of where we might end up in that regard.

In terms of the cost of the operation, what we have said, which is as of today where we would see it being, is that in a strong metal market, we're going to be probably in the neighborhood of a push, depending on the alumina price, against the contract that was percentage L&E's. If we got into a weak metal market with high gas prices, then it will cost us money, in terms of the alumina cost input into Hawesville. And so I think in weak metal markets to summarize, it is a negative; in really strong metal markets, it is probably around a push. And until we get in there with Noranda and really start to see what the operation, what else we can do in the operation, we would not want to state anything beyond that.

Last question has to do with debt levels and interest rates. In the current quarter or the quarter you just reported, your interest expenses were somewhat lower than we were expecting. And I guess the question for David is -- is that trend going to continue? Was there something that happened in the quarter? And how are you going to account for the debt at Nordural (indiscernible) are you going to capitalize it?

Okay. The debt at Nordural is very low-cost. I would suggest you go back to some of our public filings -- it was under 3 percent at year end '03. So we would expect that our interest expense there should continue on the same kind of trend for the foreseeable future. Other than that, our debt came down a little bit because we paid off the 40 million remaining amount due to Glencore. Other than that, nothing unusual. The 325 million issues outstanding, we accrued interest at the full rate, and so (multiple speakers).

-- was a Glencore paydown.

And for future drawdowns for Nordural, will you be capitalizing that?

We will. We have not done any to date. We've done just minor groundbreaking, etc., on the expansion. As we get later into the fall, we will be capitalizing some of the interest on that project.

Thanks a lot.

Larry Peck, Copper Beach Capital.

Hi. I had a question about Nordural. I might have missed this if you said it. Did you break out what the cost side of Nordural was in the quarter or the profitability, either one?

No, we don't report it that way.

I'm trying to just get a better sense of being able to look at the U.S. operations on an apples-to-apples basis with prior quarters. Is there anything you can give me, in terms of getting to that?

Larry, what I would suggest you do is you get a good clue as to the operating cost structure of Nordural by going back to our public filings, and you can see what the cost structure is. It's laid out pretty clearly and I think those basic trends should continue, in terms of costs. And I think you can pretty much model in what the contribution would be from Nordural.

I guess that kind of answers my question. So what was in the public filings is pretty much what you're experiencing?

That's exactly right. We expect the operating cost trends to continue as they are now.

All right, thanks.

Daniel Roling, Merrill Lynch.

Thank you. On Gramercy, could you just confirm that the expanded capacity there is, what, 1.25 million tons?

I think it is rated 1.2 -- a million tons of metallurgical and 200,000 of hydrate.

Second, Craig, if you don't mind, now that the aluminum inventories seem to be coming down nicely and the aluminum price stabilized to up a bit, what is your view on the restarts of the idle capacity in the Pacific Northwest? Are they still -- and I don't mean to put words in your mouth -- but are they still on the uneconomic side?

I guess that's probably better to ask the people who won those assets. But from what we know of it, the power prices are still sufficiently high up there where it is too marginal to take the risk of bringing it in. And of course, there is a significant cost in restarting some of those plants. So I think for the most part, the issue would be -- it is still too expensive, yes.

Okay, thank you.

(Operator Instructions). We have no more question in queue. Please continue.

Well, I'd like to thank all of you for your interest and for joining our conference call today. It is for us a pleasure to be able to talk about positive operating results and positive cash flow. We seem to be in a period in the market, a certain amount of strength and clearly, the inventories continue to come off. So we'll look forward to a conversation at the end of this quarter, sometime in October. Thank you very much.

Thank you. Ladies and gentlemen, this conference will be available for replay after 7:15 PM today through 11:59 PM, July 31st, 2004. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 738-416. International participants may dial 320-365-3844. That does conclude our conference for today. Thank you for your participation and for you using AT&T executive teleconference service. You may now disconnect.