Century Aluminum Co (CENX) 2004 Q3 法說會逐字稿

Ladies and gentlemen, good day. Thank you for standing by. Welcome to the Century Aluminum Company third-quarter earnings conference call. At this time, all lines are in a listen-only mode, and later we will conduct a question-and-answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference call is being recorded. I will now turn the conference call over to your host, Mr. Al Posti. Please go ahead, sir.

Good morning, everyone. Welcome to the Century conference call covering earnings for the third quarter of 2004. Before we begin, let me say that this conference may include forward-looking statements within the meaning of 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 cautionary language contained in Century's filings with the SEC.

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. Now let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Al. I would also like to add my welcome to the conference call. Most of us are in Monterey today; however Jack Gates is joining us from Gramercy and he will speak from there. So if there is some disconnect that will be the reason.

I'm actually not sure I really want to be on this call today after seeing the market's reaction to our earnings release yesterday. But nonetheless, I'm here, and in spite of the reaction I would like to say we believe we actually had a very good quarter, which included significant achievements. We will go into this in some detail.

Our operating earnings and cash flow continued to be strong during the quarter. The most positive achievement in our judgment during the quarter was a refinancing of the Company's 11.75 percent debt. We have enhanced our ability to grow under the new financing structure, and we have reduced our interest rate to just over 5 percent (inaudible).

We are not however complacent nor satisfied with where we are today. We continued to experience higher operating costs than are acceptable during the quarter. We also experienced higher than normal SG&A expenses in the quarter. We do not believe these costs are embedded nor are they permanent in either case, and David and Jack will discuss this in more detail in their presentations.

I can assure you that we will not let today's high selling prices cause us to lose our focus on the need to control and to reduce costs over the entire business cycle.

Before turning the presentation over to David, I would like to make the point that with the Nordural acquisition, the Nordural expansion, and the greatly improved debt structure, we believe the Company is well positioned for the future. With that, David would you go ahead with your presentation?

Thank you, Craig. The after-tax cost of refinancing our debt offset our operating earnings, resulting in a $16 million loss or 51 cents a share for the third quarter of 2004. As Craig indicated, the refinancing of our debt will lower our interest costs, in fact by $16 million annually. The new lower debt extends our maturities and, as Craig indicated, creates greater flexibility for the Company to execute its strategies.

With respect to our third-quarter results, our cost of sales, excluding alumina and an extra month of Nordural, were up about 5 million pre-tax compared to the second quarter. Jack Gates will comment on this in his remarks shortly.

Our administrative costs were up about 3 million compared to the second quarter for the reasons stated in the release. We expect fourth-quarter administrative cost to be about 2 million lower than the third quarter or about $5.5 million.

At this point, I will give you an update on our hedge position. The supplemental data accompanying the press release indicates the forward price sales in pounds for 2005, 6 and 7 as of yesterday, October 26.

During the past several months, we have done some forward selling to take advantage of the strong selling prices available in the market. As a percent of total capacity, we have priced 31 percent of our 2005 business, and 11 percent of our capacity of 2006 and 7. Again that is 31 percent of our 2005 business and 11 percent of our capacity in 2006 and 7.

After factoring in our percentage LME contracts for alumina, tolling, and electricity, which act as a natural hedge, 48 percent of our capacity is hedged in 2005; 30 percent is hedged in 2006; and 23 percent in 2007.

Effective with the closing of the Gramercy acquisition on October 1, we are now purchasing our alumina for Hawesville at cost instead of as a percent of the LME. This reduced our natural hedge position by roughly 10 percentage points per year. Jack will now talk about the operations.

Thank you, David. In our last conference call I mentioned that potroom operations had slipped slightly at the Ravenswood and Hawesville smelter. The problem is caused by poor anode coke quality, and the reduced operating pot count continued into the third quarter.

These problems and the resultant temporary increase in direct production costs have improved by the end of the third quarter. Hawesville is currently back to its expected level of operations with current production above forecast.

Ravenswood operations are now stabilized, and normal operating pot count is expected by the middle of November. Carbon cost at the Ravenswood facility is still slightly elevated due to the shorter anode replacement cycle caused by the anode coke quality problem.

Mt. Holly's operating performance continues excellent, but the plant has experienced several months of higher power costs due to the fuel adjustment clause in the contract with Santee Cooper.

The Nordural smelter, our newest acquisition, continues to operate extremely well with numbers equal to the newest and best smelters in the world.

The current expansion to increase the smelter's rated capacity from the current 90,000 metric tons per year to 180,000 metric tons per year is on schedule. The first concrete was poured in early October, and we anticipate startup in early 2006. A 10-year tolling contract for the output of the expansion has been completed.

As was mentioned by Craig and David, on the first of October Century Aluminum, along with Noranda, acquired ownership in the Kaiser Gramercy alumina refinery in Louisiana, along with a bauxite mine in the north coast of Jamaica.

Shortly after taking ownership -- actually the third day -- the bauxite mine experienced a structural failure at its loading dock. This has caused a temporary reduction in bauxite shipments to the Gramercy refinery. The refinery is currently operating at approximately 80 percent of rated capacity.

A temporary loading arrangement was installed this week; in fact it is being tested today. And we expect to be back very close to normal bauxite shipments late this month. The permanent replacement equipment is due to arrive in late November and should be operational in late December.

Aluminum production at Hawesville will not be affected by the temporary reduction in alumina production at Gramercy, as the plant has sufficient inventory to carry it until Gramercy is back in full operation.

Just a little bit about the market. In the marketplace demand and pricing remain strong. The current 3-months LME price is steady in the mid 1700s, with cash price slightly higher than that. The Midwest premium is currently around 7.5 cents a pound.

Plate demand is strong with leadtimes well into 2005. General engineering plate remains on allotments, and the rod and cable business remains very good. Demand for rolling slab has improved recently. About the only weak segment seems to be the foundry market which is due to material coming in from overseas. Craig, I will turn it back over to you.

Thanks, Jack. We are now ready to open it up for questions.

(OPERATOR INSTRUCTIONS) Bruce Klein, CSFB.

Just if you will help us with the surcharge at I guess Mt. Holly. What is the frequency with which the surcharge gets applied there? What is the formula? Is it driven by -- I thought it was driven by coal. Is that right?

Yes, it is basically is driven by coal, Bruce. A large portion of the coal that they use is under contract; but they do buy coal on the spot market. So it is driven strictly, basically, by the price of coal.

There isn't any specific pattern as I recall, Jack. Oftentimes in the winter you will see a fuel surcharge when fuel energy costs are tight. Or energy is tight itself. But it's an intermittent charge. I don't know how many times last year; we experienced a few. But not a steady charge, not every month, and basically based on where we are with energy.

So there is no specific formula you can track with regard to coal prices to see when that is going to reach a threshold such that they are going to hit you with a surcharge? It is not that exact?

No. In fact, once last year they lost of their nukes unexpectedly, and they had to go out and start some gas peaking stations. So, no, there is no way to track it.

Which really in that case was not even coal. That was just they were a bit short on power for a month or 2 as I recall.

Right.

I wonder, Dave, if you could just help us with the debt breakout in terms of the balance sheet. As well as I didn't know -- I know you noted $100 million of payments or paydown of Nordural debt. I am wondering if you had any breakout of the sources? I think I know the bigger buckets, but I am wondering if you have done anything on that.

The debt is laid out on the balance sheet.

The detail is there?

Yes, it is. It's all there.

The breakout of the debt balance?

The debt balance by issue. By convertible Notes, the --.

I missed it. Okay.

The unsecured Nordural debt and so forth.

I see that. My apologies.

The 100 million was from cash flow.

And the issuances of new debt. We used some of the proceeds from that as well as available cash to pay down the (multiple speakers).

So there was some excess from the financing for general corporate; and then you are saying cash and cash flow.

That is correct.

Could you just review the CapEx for '04 and '05 with and without the Iceland expansion?

We expect the maintenance CapEx to be in the 16 to 18 million range for '04 and '05. We're probably going to come up a little short of that for the core business in that we only spent 9 million 9 months to date.

The expansion CapEx, we're planning on spending approximately 50 to 70 million the rest of this year; and 250 million next year; and the balance in '06 for the expansion.

50 to 70 for the rest of '04; and then -- I'm sorry; you said 250?

250 in '05 and then the balance will be in '06.

Okay. I guess for the fourth quarter, I guess we should have -- I guess you are saying the potline issue should be less of an issue, certainly given what you said earlier, than it was in the third quarter.

That is correct.

The surcharge we just don't know at this point, in terms of what is going to happen at the end of fourth quarter?

No.

No.

Okay. I will pass it on. Thanks, guys.

Daniel Roling, Merrill Lynch.

Craig or Jack, could you go over again the electricity surcharge, or David? And was there any influence of the hurricanes going up and down the coast that might've caused interruptions to the power? Or is just totally related to higher cost to the power plant that had nothing to do with the hurricanes?

Jack, can you deal with the hurricane issue?

To my knowledge the hurricanes that hit -- I think there were like 3 of them that went through that part of the world -- had no effect on power charges. It is basically intermittent charges. It has to do with their system loads. It has to do with price of spot price for coal, which shot up. And if they lose a part of their generating capacity. But to my knowledge the hurricanes had no effect on it.

So it is not that they lost something and had to make it up.

Not to my knowledge.

Thank you. That is very important. The cost, if we just look at the cost on a per pound basis, it went up. Can all that be attributed to the anodes and the reduction cell issues?

And the power.

And I mean and the power; I'm sorry.

We were running less cells. We had the anode situation, and the power, and then the SG&A. If you're looking at the total cost across the Company SG&A was up.

Correct. Okay, thank you.

Jeff Kutsel (ph), Trafolet (ph) and Company.

I was wondering if you could please talk about some of these cost-cutting opportunities you mentioned. Specifically items that are in your control at existing facilities. So excluding hedges or acquiring lower-cost facilities going forward. Whether it is better material management, improving energy efficiencies, reducing maintenance costs; whatever it is.

I'm aware of some of the initiatives you're working on at the Hawesville facility. Maybe you could give us an update on how those are progressing; and then also anything specific that may be going on at any of the other plants.

I will address that. We have cost reductions or cost containments at all of our plants ongoing. It is a current battle, because there is so much going up in our industry. Health cost is going up, energy costs, raw material. So we have very active cost reduction and cost containment.

Let me talk about Hawesville. I will talk about a couple of major issues we have got going on at Hawesville. The first one probably is optimizing the product mix in our casthouse at Hawesville.

We have exited -- we have made an announcement that we are exiting the foundry business at Hawesville. As I mentioned earlier there is so much of this business coming in from overseas that the prices are not going up. Energy costs are going up, hardware (ph) materials. So we are actually exiting the foundry business which will be a fairly major manpower reduction in the casthouse there.

Also along with that we have had approval for an automated sow caster that will be installed in 2005, which will automates the pouring of sows, which is another labor reduction.

We have targeted our costs, our capital projects for next year that at least 50 percent of them will be cost-reduction projects; and I think the last number I saw was 42 percent are driven to reduce costs.

Safety performance, which drives excellence, is improving. We are almost 2 million man-hours out of lost time accident.

We recently installed some new pot control systems that will help us reduce the pot voltage on a pot, which will basically improve our energy consumption per pound. We are continuing to raise amperage at all of our plants. One of the best things you can do of course is make more metal, so we are continuing to raise the amperage and increase the production at the plants.

We also are implementing a maintenance reliability plan, which basically will increase the uptime on equipment and reduce our cost. So we have got programs like that going on at all of our plants. It is an ongoing system, and we do it every year, and we work on it on a daily basis to drive the cost down.

When you talk about these 6 or 7 items specifically at Hawesville, can you quantify maybe what the savings there would be? Are comparable initiatives happening at the other facilities as well?

They're happening at the other facilities. The Ravenswood facility because of the age of the facility is more of a cost containment, of trying to keep the costs from going up. The Hawesville plant is to actually drive the cost down below. So we're anticipating a 2005 cost -- actually metal cost out the door would be actually less than 2004.

Mt. Holly of course is operated and run by Alcoa, but we have an owners committee. They're doing the same thing. They're pushing production. All 3 plants are basically setting records on production. And the last pounds you produce of course are the cheapest pounds you produce.

I think, Jack in terms of where we are in the different plants, Ravenswood over the last few years we have spent a lot of effort bringing costs down there, which I think we have succeeded in doing. We probably -- you have to continue to work on that, but there's I would assume not a lot of room left there.

A lot of the opportunity is at Hawesville today. Nordural is extremely well run; very low cost to start with. The situation in the industry today, especially in the United States, is that if you can hold your own from a cost standpoint that is a pretty good achievement. In other words try to just keep your cost even, so your reductions are offsetting the natural increases that are occurring in healthcare and other areas.

Do you think, given what you are doing, you can more than offset the creep in the other areas?

I don't know. I think there's probably that potential at Hawesville. Jack, you would agree? But across the board, that is challenging.

Challenging, but with energy cost going up -- that is the big driver in our business, of course, the energy cost. I think you are right, Craig. At Hawesville we can do it.

With Ravenswood it is going to be a little tougher because we don't have quite as much to work with there. Mt. Holly is a very well-run plant; it is probably one of the most efficient plants in the world as far as labor efficiency. But their power cost is not cheap there.

I think the answer is it is a mixed bag. Overall if you hold your own, subject to some new things that come along -- for example the change of our casthouse structure at Hawesville -- you are really going to do that. You're not going to achieve large reductions in these operations in the United States today.

Okay, great. Thank you.

Marty Pollack, NWQ Investment Management.

Just a couple questions. In terms of fourth quarter, I'm assuming with now higher LME price we're getting realizations closer to 90 cents. Is that a fair thing to say? Would that be fair in terms of just kind of where you are as we are in the fourth quarter?

Take the LME; and for the unpriced portion of the material you add a Midwest premium of roughly 7 cents a pound; and that is the realization.

So effectively you have got a pretty good recovery start here in the fourth quarter. Let me ask you with regards to the hedging, any reason why you would not consider -- or would consider let's say -- increasing your hedging into 2006 at this point? It just seems that you would think with these prices you might want to consider going further.

We have. We have increased our hedging. We have historically been hedged in times when the market warranted it in the range of 45 to 55 percent, including alumina. If you look at what --

I am thinking about sales in the Selling forward portion of this hedge. You know, 11 percent into 2006.

We have. I think the total hedge -- what was the total, David?

In 2006 we sold forward priced 11 percent of our business. Then with the natural hedge we're up to 30 percent.

So I think you have to look at the total hedge position, not just --

I understand that.

But the answer is, we agree with you and we have been increasing our hedges in '05 and '06 and a bit in '07 over the last months. And we continue to look at that.

A lot of that depends on the forward market and the level of the backwardation, which has come in a bit recently. As you can see from what have put in our release, there have been some increases in our hedge position. We will continue to look at that.

Our view is to hedge into the stronger markets, to create this balance for the Company, and the underpinning in the event the cycles change, which they always do. We are doing that and continuing to look at that. Our objective is to achieve forward sales at prices that yield not only a positive cash for us, but also a positive book return or book earnings, and a satisfactory return for the Company overall.

So the ability to do that depends on 2 or 3 things. 1, the level of backwardation, which has been quite high as you know; and secondly, the liquidity in the forward market. Right now, the further out you're going the forward market is very il-liquid.

So that you can do some, but if you were to go out with any significant amount of tonnage at once, either the market isn't there -- which means you are going to change it -- or you just can not sell it. So there are a number of issues that affect how we hedge and when we hedge, and liquidity in the forward market is certainly one of them.

With regard to -- outside of Mt. Holly -- the other facilities, what is your power position and alumina resources? I think you get contract prices on both. Just if you would elaborate, because it seems that the problem here was primarily Mt. Holly surcharge.

We have some power surcharge at Mt. Holly. That's a correct. At Hawesville 100 percent of that now comes from Gramercy. It is a cost-based contract today. It will continue as such.

And the power goes through 2010. Most of it is priced, it's fixed-price. We have a portion opening up I believe it is in '06 which we are currently working on in terms. It is under 30 percent of the power is unpriced starting in '06. So it is basically a quite stable situation.

In the case of Ravenswood, the alumina is percentage LME which runs through I believe '06. And the power runs through, runs into '05, '06. And we are currently in-process of working on the extension of that power contract, and it would be at a fixed price.

Alumina percentage is still more or less the same as it has been before as far the ratio?

Yes, the consumption of alumina. But the percentage of alumina that is purchased against the LME, in other words forms a natural hedge, has dropped from 25 percent down to about 12.5, 13 percent because of the acquisition together with Noranda of the Gramercy asset.

Lastly, the Ravenswood status vis-a-vis Alcan Pechiney merger; is there any indication that -- any change in?

None whatsoever. They are taking I think at the high end of their min/max contract; and it's business as usual at this point.

Okay, thank you very much.

Michael Gambardella, J.P. Morgan.

I had a question in terms of all of the non-recurring hits that you had in the quarter. Have you totaled them up? What do you estimate the total non-recurring hits in the quarter were?

I will tell you if we take the 5 million in cost of sales, the 3 million in SG&A, and then we take our hedge loss of 3.1 million, that is a little over $11 million. After-tax that is 7 million or 22 cents a share.

If you add that and adjust for the loss on the extinguishment of debt, that gets you back pretty close coincidentally to the Street average of about 67 cents.

Most of that we think is pretty much going to go away in the fourth quarter. Certainly the operating side, Jack, I think you're pretty comfortable where they are on most of that?

Yes.

There may be a little bit of hangover left in Ravenswood. Then the Mt. Holly power surcharge we don't at this point how much of that will apply in the fourth quarter. The SG&A I think David has said should come down by about $2 million against the third quarter. So a good deal of that we are quite positive will come back to us in the fourth quarter.

Okay, thank you very much.

Alex Latzer, Merrill Lynch.

A couple of my questions were answered, but on anode coke quality issue at Ravenswood, could you elaborate a little bit more? Was that in the anodes you receive or in the coke you receive?

It is in the coke we receive. Give you a little background. Anode-grade coke is a byproduct of the petrochemical industry. And with the problems going on in the industry right now between the sweet and sour crudes, you literally buy a waste product from the petrochemical industry.

So they run these plants to maximize their profits on the front end, and the coke that comes out can either be sold as anode-grade quality or fuel-grade quality. And they really don't care too much. So you're buying a waste product.

What happened is the quality of the coke around the world has really gone down significantly in the last 12 months. We have made a few changes in our operations and we have improved it. At Ravenswood for instance we would normally replace the anodes on a 16-day cycle; we are replacing them right now on a 15-day cycle. We expect to be back to 16 hopefully in the fourth quarter. So we're back to somewhat next to normal.

The quality really had improved a whole lot, but we have learned to deal with it a little bit better. But it is an issue going forward. And we have plants overseas and I talk to people; it's a worldwide issue right now. Anode-grade quality around the world has gone down. It's tied to the oil industry.

That is very interesting. Thanks for that. I was wondering, looking at the production ahead, could you give us some guidance on your production in the fourth quarter? I know your capacity really should put you around the 330, 340 million ton rate per quarter. I wasn't sure whether you would be able to get back up to the full rate.

I sort of took the rate and two-thirds of Nordural in the third quarter, and the production was a little light. I know that you hade these reduction cell issues. But in the fourth quarter, what do you look for? I would expect somewhat of an increase from the third quarter level.

I think our total tonnage is 650,000 a year. I think you must have been in millions of pounds. But we should be very close, Jack, to back to our full operating levels during the fourth quarter, wouldn't you think?

Yes, absolutely.

Good; that should obviously help your unit cost quite a bit.

Yes.

Yes.

How do you feel about, with Nordural coming in -- I know that on your cost side per pound, you had sort of targeted informally about in 1-cent per pound improvement in cost, maybe, on an annual basis if you could.

Certainly with Nordural coming in that is the lowest cost plant on your network, do you think you will be able to get back, maybe not this year, but cutting (ph) into '05? What is the cost trend? Do you think you can get back to that 1-cent net year-over-year savings again, and perhaps more with Nordural?

That is our objective. I think again with these issues that we faced in the last 2 quarters pretty much under control, yes, we should achieve that. Jack, do you have any further comments on it?

No; except I agree, Craig. Nordural is running exceptionally well. It is really at a world-class operating facility right now.

Good, thank you very much. Good luck.

Larry Peck, from Copper.

From Copper Beech Capital. Just a couple of questions; I might have missed this if you gave this out. But the first is on the hedging. Did you give a price, an average price at which you hedged for those years?

No, we didn't.

Would you be willing to do that?

No, we don't.

Why is that?

We don't disclose it. What we will tell you is -- to some extent you can do some of this yourself by looking at the forward screen and looking at the level of backwardation.

The big challenge in hedging other than liquidity, which I mentioned in my earlier comments, if you are hedging into the U.S. market we have been experiencing very high Midwest premiums this year. Well above historic averages. As you go -- the further you go forward the less confident the marketplace is that that spread will necessarily continue.

So when one is looking at the forward price, you have to recognize that that roughly 7 cents a pound we have been getting a good deal this year is not available to you if you do any forward selling into the Midwest in the future. In '05, it is better than it is in '06 and so on.

What our objective will be is to achieve a strong price against what the forward market has; and that will always yield at least in the range of the long-term value of aluminum, as we have discussed in the past; and will give us a positive not only cash flow, but a positive return as a Company.

So if you try to put all that together that will give you an idea of how we look at the number. But in the specific number we don't disclose.

I will at least ask you in terms of timing, have you captured at least the recent rise that we have seen? Is it safe to at least assume that? If I went back and looked at the curve, the average curve in the third quarter, is that probably (multiple speakers) ?

Most of what we have done this year has been recent. That means, yes, we have captured most of the improvement in price. But again, over this last quarter -- when the market peaked for example, the nearby market peaked at $1,860 or whatever it was, the price in '06 for example against today's market of well under $1,800, the price is not all that different.

So what happens is, as the nearby price gets higher -- you probably know all this, so I'm wasting your time -- but as the nearby price gets higher there is a bigger backwardation as you go out on the forward price. That starts to level out the further out you go.

But I would say yes, I think we have done a fairly good job in picking up the recent improvements in both the nearby and forward price.

1 last question. I think on the last call you had given an EBITDA estimate -- I'm sorry, not an estimate -- an EBITDA number for Nordural. I did not hear that. Would you be willing to give that if I missed that?

I think what we had was in the published data; the Nordural numbers were in there. But I don't think we gave an EBITDA number.

No; we did not.

Right, that's what I am asking. I think you might have given one on the conference call last quarter and was wondering if you could give that again.

No. We did not put an EBITDA number out there. I think what David did was refer everybody to the published data we had with Nordural.

I see; okay.

It's fairly easy to figure out what the revenue and the costs are by going back to the published audited financial statements. You can pretty readily figure out what the operating contribution would be from Nordural.

Okay, so nothing materially has changed since then?

No.

No.

That's all. Thank you very much.

(OPERATOR INSTRUCTIONS)

No additional questions?

No. There's no questions; please continue.

All right. That wraps up our formal presentation. Again we appreciate your interest and your joining us today. Hopefully our presentation has clarified a number of points for you.

I think we feel that actually the Company is performing quite well. There is no question that the issues on the cost side showed up strongly in this quarter, especially against maybe some expectations. But these are not embedded costs, as I said earlier. We're working on these. A good many of these are already behind us.

So we have a very positive view as long as these markets continue and the global economy continues to be strong, that we will be back to where we have been earlier in this year and that our overall cost position will be quite positive.

One thing I might also add in this regard is that in terms of SG&A there has been some focus on that. It was up somewhat. But I think it is important to recognize that as a percentage of our revenue our SG&A -- actually this is one of the lowest years we have experienced in the last 4 or 5 years that we have been tracking this.

The Company has grown rather significantly in the last couple of years with virtually no increase in SG&A. So there again, as a percentage of revenue the SG&A is not up. In raw dollars it was up; and a good deal of that is not going to be recurring. So we will bring that down where I think actually our SG&A should come in at levels, as a percentage of revenue, which are below what we have historically achieved.

With that, we will sign off for this time and hopefully look to a good call at the end of the next quarter. Thank you very much.

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