Century Aluminum Co (CENX) 2004 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the fourth quarter 2004 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given at that time. If you should require is assistance during the call, please press star, then zero. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host Michael Dilldine. Please go ahead.

Good morning, everyone. Welcome to the Century conference call covering earnings for the fourth quarter of 2004. Before we begin, let me say that this conference may include forward-looking statements within the meaning of Federal Security Laws. Century has based its forward-looking statements on current expectations and projections about the future. However, these statements are subject to risks and 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, Mike. I would like to add my welcome to all of you who are joining our fourth quarter and year-end 2004 conference call. We're all in Monterey today. David Beckley and Jack Gates will be covering the details of the fourth quarter, and our overall year results as well. I would like to focus on 2004 as a year, including both the positives and the negatives that we experience during the year.

In terms of pluses, clearly we had a very strong market and very strong aluminum prices. While we can't really take credit for the healthy global aluminum fundamentals, I think what we have seen is that our basic strategy of maintaining a balance between the underpinning of the Company with forward sales and participating in the upside worked in 2004. As I recall, we entered the year at about 45 to 50 percent hedged. We were able to enjoy the improvement in the market as it occurred during the year.

Our achievements during the year consisted of the acquisition of the 90,000 ton Nordural plant and then the immediate commencement of 122,000 ton expansion of that plant. That expansion is currently on time and on budget, even after the impact of the relatively weak dollar which of course has been a negative to our construction costs. The next, I think, important item for the Company during the year was the refinancing of the Company, which provided a more flexible financial structure, and at the same time will reduce our annual interest expense by approximately $16 million a year pre-tax. We also entered into a participation with Noranda to acquire the Gramercy and Alumina and Saint Ann bauxite mine in Jamaica. This allowed us to ensure a secure supply of alumina for Ozville [ph]. I believe in this acquisition, while it was more defensive and to ensure the supply, we are experiencing some unanticipated upsides to the transaction, as it evolves, we will tell you more about that.

Finally, consistent with the strategy we have all along articulated of underpinning the Company to be able to go through the inevitable down cycles that occur and remain cash flow positive, and at the same time participate in the strong cycles for the market, we did put in place a significant five-year forward sale in the fourth quarter. To give you a little idea how this works, the basic pricing of this forward sale was based on the forward market at the time the transaction was entered into. And this was applied to a base tonnage which I believe is disclosed in our press release that runs from 2006 through 2010. If at the maturity of any particular hedge or forward sale, the then current market price is higher or exceeds the original hedge price, we participate in some additional upside. Ie. some of the increase. And we will participate in that increase up to a ceiling price for across all of our base tonnage in the hedge or the forward sale. If the market at that time then exceeds the ceiling price, then the base tonnage is doubled and that becomes, in essence, our new hedge price, and everything would then be sold at that price. Any increases above the original hedge, by the way, or any change in this pricing is calculated on a monthly basis, so it is recalculated from month to month, not over a longer period such as a year. So if you had a high price for one or two months out of the year, you would not impact your whole year. It goes month by month in the way we recalculate it.

In terms of the minuses, we had several factors which negatively impacted our 2004 results. The first was the poor quality of coke -- coke, which we experienced in the earlier part of the year and actually throughout most of the year. This increased operating cost, but since that time, we have adapted our operating practices to utilize this coke, and has offset most of the cost impact. Jack may explain this a little further in his presentation. Next our pot count was down at Ravenswood which meant our production was down somewhat and that increased our average unit cost at Ravenswood. This has now been corrected, or I think as we speak the correction is actually being put in place. We also experienced some power surcharges at Mt. Holly. We believe there will be some level of that surcharge which will continue in 2005. We had a conveyor failure which we talked about at the Saint Ann bauxite mine shortly after we took over, I think it was the second day after we had taken over. While this did not impact our metal production in Hawesville, there was a cost to the Company, which I think we also disclosed in our recent press release. But we did continue to run Hawesville at capacity. Finally, our SG&A costs were up somewhat in 2004 on a dollar basis, as a percentage of revenue, they were not up, they were one of our lower years. But -- and this was caused mainly by professional fees relating to Sarbanes-Oxley compliance. And to some extent, the acquisition and refinancing activities of the Company. We also had somewhat higher compensation expense, and this is in line with what what we have explained to you in the past, that our basic compensation philosophy is to have a significant portion of senior management's compensation tied to the overall success of the Company. And of course, 2004 was a good year for us, and so it was reflected in that.

Basically, 2004, I think it was a very positive year for the Company. We had strong aluminum fundamentals. The accomplishments that were achieved in 2004 will substantially strengthen the Company's near and longer term future. At the same time, we want to assure you that we do remain focused on cost control, and on reducing our cost and bringing in new assets to the Company that will further reduce our position, our overall cost -- pardon me, position on the cost curve. David?

Thank you, Craig. Century reported fourth quarter income of 20.9 million or $0.65 a share. We estimate that the equipment failure at the bauxite mine in Jamaica reduced net income by about 2.2 million after tax, or $0.07 a share. As Craig indicated, although the equipment failure did not interrupt aluminum production at Hawesville, we were unable to ship bauxite to a third party customer, we lost chemical hydrate sales from Gramercy and lowered bauxite shipments to Gramercy affected the production rate and cost at Gramercy. We and our partner will be filing an insurance claim and anticipate recovering some of these losses later in the year. The permanent new equipment was installed in late December and production and shipments are now back to normal. In term of cost of sales, we continue to be impacted by electricity surcharges at Mt. Holly but at a lower rate than the third quarter. However, our pop count basically as Craig indicated, has come back to where we expect it to be. Our alumina costs were higher than the third quarter for several reasons. First, with higher alumina prices we paid more for alumina under our percentage LV alumina contracts. Second, production costs at Gramercy were impacted by the equipment failure in Jamaica and high natural gas prices. Our selling, general and administrative expenses were about 2 million higher than we anticipated going into the quarter due to accounting, auditing and professional fees, and as Craig indicated we had some additional incentive compensation costs that we had not put in our estimates. On balance, as Craig indicated, we had a very good quarter and year from an earnings and cash flow statement standpoint.

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, '06 and '07 and for the period 2008 through 10 as of the December 31, 2004. During the past quarter we did some forward selling to take advantage of the strong selling prices available in the market. As a percent of total capacity we have priced 32 percent, 24 percent, and 23 percent of our 2005, 2006, and 2007 capacity respectively. The forward price sales for 2008 through '10 represent about 10 percent of our capacity. After factoring in our percentage LME contracts for alumina, our tolling range at Nordural and our electricity contract that is a percentage of LME at Nordural, which act as natural hedges, 49 percent of our capacity is hedged in '05, basically no change from the prior quarter. 44 percent is hedged in 2006 and 35 percent is hedged in 2007. The hedge percent in 2007 would increase to about 45 percent if we were to enter into new percentage LME alumina based contracts for Ravenswood Mt. Holly in 2007. Most of those contracts expire at the end of '06. At this point I will turn it over to Jack who will comment on operations.

Thank you, David. My comments will cover basically the fourth quarter and 2004 in total. All three of the Century U.S. smelters finished the year at or above most key performance indicators. The newer -- the newly acquired Nordural smelter exceeded our expectations in every area. As I mentioned in our last conference call and Craig mentioned, carbon quality and operating pot count affected metal production during the second and third quarter but the worst seems to be behind us. While carbon quality hasn't returned to the desired level, our smelters have instituted the necessary process changes to minimize the effect on pot room operations. We have actually changed the fliers in one of our smelters. Even with these issues three of our four smelters set annual production records in 2004 and the total 2004 production exceeded our target to over 1 million pounds.

Craig mentioned cost containment. We still continue to focus on cost containment at all of our smelters. In our three U.S. smelters reduction in both its salary and hourly personnel, mainly through attrition, were in excess of $5 million in an annualized basis. Craig mentioned our Nordural expansion, it is going very well. It continues on schedule and at budget. Projected startup of the first pots continue to be early 2006 with the 90,000 metric tons per year third phase completed by mid year. The startup of the 32,000 tons per year fourth phase will occur late in the latter part of 2006. The bauxite mine in Saint Ann Jamaica is back in full operation as of the end of the year with the replacement of the damaged ship loader. With bauxite again flowing at the normal rate to our Gramercy alumina refinery, it is back to operating and shipping at a maximum capacity.

Talk a little about the marketplace, demand remains strong as evidenced by today's midwest premium of 7.4 cents per pound and today's LME cash was 1976. LME stocks continue to fall, and are nearing the 600,000 metric ton mark. The demand in aerospace and tooly markets remain strong and we hear that Boeing and Air Bus are both attempting to source additional plate to meet their current schedules. General engineering plate remains an allotment and the rod and cable market continues strong. Craig, I will turn it back over to you.

Thank you, David and Jack. We will now, Linda, open the conference for questions.

Thank you. And ladies and gentlemen, if you wish to ask a question, please press star, then one on your touch-tone phone. You will hear a tone indicating you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If are you using a speaker phone, please pick up the handset before pressing the numbers. Once again, if you have a question, please press star one at this time. One moment, please, for the first question. Our first question will come from the line of Terence Ortslan from TSO Associates please go ahead.

Thanks. I was just going to ask you about your 2005 cap ex numbers, and also your depreciation amortization rate, and possible tax rate that we should be incurring or estimating our models. Thank you.

Go ahead, David.

Okay. The maintenance cap ex is going to be probably in the 16 to 18 million range. And the major capital expenditures over Nordural will be 300 to 320 million this year. In terms of depreciation, based on our internal plans we expect somewhere in the neighborhood of 56 million in '05. And I forget what your third question was.

Tax rate.

The tax rate, I would assume, you know, 36, 37 percent tax rate.

Okay. Much obliged. Thank you.

Our next question will come from the line of Alex Latzer from Merrill Lynch. Please go ahead.

Thanks. Good quarter. Congratulations.

Thank you.

A question on the gain on the forward contracts, or actually it was a loss, the 4.375 million. I'm probably going to afraid to ask this, but in a rising aluminum market can you just explain the mechanics of how that arose?

Alex, a lot of the hedges that we put in place in '04 are, you know, if you will, under water. The -- what runs through this line, by the way is, those hedges that don't qualify for cash flow hedge accounting, and so that's basically what's running through there. And those hedges are -- against the current market -- are a little bit under water and that's what results in a loss for the quarter.

I can understand that. Thank you.

Noncash. Yeah, based on did --

Noncash, yeah, okay, of course. Also, do you have any idea on your interest expense, just guidance for 2005 as well?

Yeah, Alex, again, based on our internal planning -- and again this will be driven a lot by our cash flow, but I would also point out that we will be capitalizing interest on the Nordural project, we expect our P&L interest to be in the 25 to 27 million dollar range. That's what we will get our P&L for '05.

Okay.

Including Nordural.

Including Nordural. Okay.

That's the interest expense. The actual cash interest will be higher than that, we will be capitalizing a portion of it.

Right, okay. And then last question, I noticed on the balance sheet the year ending debt level was a little lower than I was expecting. Is there going to be something carrying on in just the final bit of your refinancing into the early part, the first quarter or is this pretty much it?

Okay, just a comment, as we've indicated, we just put in place a $365 million credit facility in Nordural that will help finance the expansion. We -- as part of that facility, we basically paid off the remaining project finance that was there. We've also sent over a fair amount of cash to Nordural. The amount -- the use of that facility will be a function of the amount of cash we generate at Nordural, and we also have the ability here in the U.S. to send potentially excess cash flow over there. So the level of borrowings we have are going to be a function of when we spend the money on the capital project, and our cash flow.

Okay. So if I can follow your operating rate, as far as your ramp-up, and assume that you will have spent it all pretty much by late '05, I would assume.

Well, as I indicated, we expect -- we spent about 65 million in '04. We anticipate spending about 300 to 320 million in '05, the balance will be spent in '06 in terms of that -- the 454 million dollar capital project for the expansion.

Okay. Great. Thanks very much.

Our next question will come from the line of Brett Levy from Jefferies & Company. Please go ahead.

Hey, guys. Could you talk a little bit about kind of where you see alumina prices right now, what your outlook is, and as a result of that, and your increasing aluminum capacity, whether it remains somewhat of a priority to increase your -- I don't know, access to alumina, either through building, or some sort of strategic partnership going forward?

Well, right now, I think the spot prices are strong, pretty strong in alumina again. They've stayed quite firm over the last, what, 18 months, and they have been up and down a bit, but quite strong by historic standards. In terms of where we're going to go, we have said in the past, and it remains the case, that we think strategically we should be looking at upstream opportunities, which by that I mean bauxite alumina, we've explained really the nature of the Gramercy Saint Ann's acquisition, which was somewhat different. But for the future, yes, I think we definitely view that with interest, and we see the upstream potential in two lights. One has the stand-alone business which is important to us, that it actually generates the returns that we would want. And secondly, there is an element of integration there as well. I can't remember if you had a third part of that question but anyway, those two pieces.

I mean basically, where do you see alumina pricing going over the next couple of years?

Well, I think what we're seeing today is it looks like it should remain firm. I know there is -- there has been some recent write-ups and discussion that alumina out in, what '07, '08, somewhere in that range, some people feel may come off a fair amount. I'm still waiting to see why that is. I'm not sure I understand those predictions. And so I think at this point, based on the metal production we're seeing and the amount of alumina that is available today, we feel alumina will be a relatively strong market for the foreseeable future.

Got you.. Can you guys talk a little bit in the current pricing environment about where you see working capital requirements going? I'm guessing that you probably are a user of networking capital. Have you guys tried to put a number on that for 2005?

Brett, I would just comment that really the major impact on our working capital is if aluminum prices are higher, our receivable goes up. Our payables, do, too. But that's offset by increases in inventory. So the major impact is on receivables, and it's not that significant.

All right. And did you guys put out a 2006 number at all? I know you mentioned the 454 of total cost and that sort of thing, but do you have a plan number for 2006 cap ex at this point?

No, we don't. But what we have said in the past is that we expect our maintenance cap ex to be in the range of 16, 18 million, maybe 20 million, if something a little higher comes in. And the number we put out on Nordural, which is the only -- the major thing in our capital plans, that we've announced, is 454 for the total, and I think if you add up David's numbers, that leaves about 60 or 70 million to be spent in '06.

All right. Thanks very much, guys.

Okay.

And if there are any additional question, please press star one at this time. We will now go to the line of Kevin Cohen from CSFB. Please go ahead.

Thanks. Kevin Cohen for Bruce Klein here. If you can just give us a little more color on how phase two of the expansion is going? I guess that started up in October?

Phase two, you mean at Nordural?

Yeah.

Well the 90,000 ton expansion is under way. As I think Jack said, on time, on budget and we expect power to the first pot sometime in the first quarter, I believe of next year.

And did you mention that the weaker dollar is increasing construction costs there or can you quantify that?

We did and in the context of what I said was that we have basically, since we're on budget, we've offset some of the negative of the weaker dollar by coming in under budget in other areas. But right now, they are about balancing each other.

Okay. And then turning to China, what have you guys seen there in terms of supply and demand and I get guess just globally any new aluminum supply coming on given prices are so firm?

I don't think we've see China as being all that different from what we've said. They have, I think, changed their basic approach in terms of the export incentives that were there. I think those have disappeared now. China, from everything we see, continues to be a strong marketplace and continues to grow, and expand. I don't think we've ever assumed it was going to be as big as some of the numbers we're seeing, nor as small as some of the people were predicting. But from what we know today, it seems to be continuing to expand at a pretty good rate, and consume a lot of the basic raw materials, including aluminum. In terms of additional capacity, I have to say, I haven't seen anything in the last 30 to 45 days, and I will ask Jack and David to jump in if they have, that has changed. I mean, I think we know what was out there, it was being discussed last year and I haven't seen any additional plans on top of that in the last say 30 to 60 days. Have you guys?

No, I have not.

Okay. Great. Thanks.

Our next question will come from the line of Tony Rizzuto from Bear Stearns. Please go ahead.

Hi, good afternoon, gentlemen. I jumped on the call a few minutes late so my apologies if this is redundant, but in regard to the forward sales program, can you guys give us an idea as to the ceilings on the program?

Well, as you know, Tony, we don't put that kind of detail out. But how can I try to help you? I mean basically what we have is a two tiered structure, where we -- the forward sales were against the market, when the forward sales were put in place. Against the future market.

Right.

Not over time. And what we have is the ability, the right to participate in a higher price if the price at the time actually goes up. And it is a -- it's a not insignificant amount that we can participate on the upside. So that the ultimate forward sale, at a higher tonnage, would be somewhat higher than what the market would have been at the time we entered into the transaction.

Right. So it allows you the flexibility as you're moving out in time for the ability for you to be able to lock into a higher pricing structure.

It is actually automatic, Tony. I mean it is a structure that says if the price -- you have a base tonnage, and if the price goes up by X, the base tonnage participates in whatever that increase is, automatically.

Okay.

So it is not the forward -- the forward price is not absolutely fixed. It is fixed with an upside.

All right.

Put it that way. Then in addition to that, what it says, is if it goes over a certain say ceiling, if you want to look at it that way, then the tonnage doubles, and we participate at the ceiling price. And that's for all of the tonnage. And so it really sets a new forward selling price, which was -- would be the original price, plus the additional amount up to the ceiling.

Sounds like a very attractive program for you guys.

I think it makes sense for us. And there's -- it's not really optional in the sense that most people look at it because it is automatic.

Right.

And the other side, the tonnage has to be there. We have to do it, and they have to take it, but for us, it gave us a little more participation in a stronger market, which obviously we're always looking for, and at the same time, we felt that the tonnages -- we would be happy to sell at those tonnages, and so from our perspective I think that's how we saw it. I think from the other side, I think how they saw it is it gave them some attraction for additional tonnage so I think it is was something that worked out for both parties.

I have one follow-up if I may. I think I heard you say Craig, and correct me if I'm wrong, but we know about your desire to want to be more backward integrated and I think that makes sense over the longer term.

Right.

Did I also hear you say that you think there is opportunity to be a third party seller as well?

I didn't say that but I think if we -- I think -- I implied that Tony and if we look at going into the upstream businesses, we want them to be businesses that are justified in their own right. And we certainly anticipate that we could end up as a net seller of alumina. And being in that business, yes.

And again, it is with the overall view, as you guys -- as we look out at Century Aluminum, what you're doing again to get into parts of the world where operating costs or production costs are lower and to lower your average costs overall?

Yes, that would be the objective.

Okay. Very good. Well, good performance.

Thank you.

Look forward to seeing more more.

Thank you. So do we.

And we have a follow-up question from the line of Alex Latzer from Merrill Lynch. Please go ahead.

Thanks, Alex Latzer. Positives on Gramercy that were unexpected you mentioned in your opening remarks, can you elaborate on that?

I think it is probably a bit early, but I think what we're -- what we're finding is that maybe there is a little more opportunity in the buck side shot side of the business than we had anticipated. Actually, let me say it this way. When we looked at this, we did not try to justify the acquisition by saying we're going to go in and approve this, this, and that or we're going to make it a lot better or there is a lot of other opportunity there. We felt the right way to look at that was more of protecting our position, protecting our plant at Hawesville and therefore we sort of took it as it came to us. What we're finding now as we get into it further and working with our partner there, that there are opportunities and there are opportunities on the mining side and we think maybe there are some opportunities on the refining side as well. And so those, as we get further into this, will be the kinds of things that we think will give us a little improvement in terms of the cost structure we end up with there.

Okay. Thanks. Thanks for that, Craig. You know, I wanted to get into the issue of the state of the U.S. aluminum market and demand. It was strong in 2004. Then there was some -- some hinting that perhaps there was some restocking during 2004 and that was probably much the case. And I was just wondering if from your observations, or your company's observations on the market whether you can shed any light on what you're seeing. Are your customers -- were their inventories now normal relative to where they were a year ago or are they above normal or do you find the demand remains robust and they're still hungry?

Well I will answer that two ways. I will let Jack take the basic market side, but I think one of the things we're looking at just the level of inventories. For example, on the LME, they're down at extremely low levels and as a percentage in days I don't know what it its, but it is probably below 40 days today. And I haven't seen an IEI statistic lately, but certainly the overall inventory position out there has been coming down. And I think eventually, that if people look around and say gee, there is only 38 days on the LME or whatever, that will start to maybe -- maybe something it is happening today, I don't know, but so I think what we've seen -- I've seen is a draw-down. And then in terms of the basic consumption side, Jack maybe have you some thoughts on that.

The customers that we talk to, they're taking more metal and we don't see any restocking at all, any inventory buildup. They're using up, in fact their inventories in some cases are actually going down. So no, I don't see any of the restocking you mentioned. The market is fairly tight. As Craig said, its evidenced by the continuing fall on the LME.

Good. Well, thank you very much.

Okay.

And we have no further questions at this time. Please continue.

Well, that concludes our presentation. Again, we appreciate you joining us and your interest. I think to wrap up, again, we feel 2004 was a year of accomplishment for the Company. At the same time, though, we don't intend to go to sleep in our chairs so to speak. We think there is a lot left to do. The markets are supporting us today. Which is good to have and good to see. But we think we need to do more work with the Company, and we need to do more work on our cost side, and more work on the opportunities that are in front of us, which will pay off both in good and bad markets so that's our basic objective for 2005. And we will look forward to talking to you at the end of the first quarter. Thank you very much.

And ladies and gentlemen, this conference will be available for replay after 7:15 p.m. tonight through midnight on February 25 of 2005. You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 766289. International participants may dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844. Access code 766289. That does conclude our conference for today. We thank you for your participation and for using the AT&T executive teleconference service. You may now disconnect.