Century Aluminum Co (CENX) 2005 Q1 法說會逐字稿

Welcome to the Century Aluminum Company first quarter 2005 earnings conference call. At this time all lines are in a listen-only mode. Later there will be a question-and-answer session and instructions will be given at that time. [OPERATOR INSTRUCTIONS] As a reminder today's call is being recorded. At this time I'd like to turn the conference over to Michael Dildine. Please go ahead, sir.

Thank you, Kent. Hello, everyone. Welcome to the Century conference call covering earnings for the first quarter of 2005. 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.

For more information about these risks, uncertainties and assumptions can be found in the risk factors and forward-looking statements cautionary language condition contained in Century's filing 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. Now let's begin the conference call. Here is Century's Chairman and Chief Executive, Craig Davis.

Thank you, Mike. I'd like to add my welcome to all of you to our first quarter call. We are spread around the world today and at different locations so you'll have to excuse us if there is a little bit of confusion on our part. Because we're not sitting in front of each other but hopefully we will be able to get everything across to you. I'd like to focus on the overall results and then David and Jack will cover financial and operating results. The Company certainly benefited from the strong industry fundamentals during the quarter. Both revenue and operating earnings were at or near record levels. The operations continue to perform quite well, continued to I should say, perform quite well during the quarter.

We completed the financing for the Nordural expansion during the quarter as well. I was in Iceland earlier this week and was most impressed with the progress on the expansion. It is going well, and Jack will discuss in that more detail. Finally, we want to assure you that we are continuing to focus on improving our operations and reducing costs. While during the quarter we did have a few operating problems, which Jack will also discuss in more detail, with one exception we believe that most of these problems are behind us and not permanent. We would note that the Mt. Holly power surcharge will continue, it appears, at higher levels than we originally anticipated and probably throughout this year. David, will you now cover the financial results?

Sure. Thanks, Craig. Century reported first quarter income of 11.1 million or $0.35 a share. Included in the results is an after-tax charge of 14.5 million or $0.46 a share for mark to market adjustments on ford forward contracts that do not qualify for cash flow hedge accounting. As indicated on our last conference call, we put in place a significant five year forward sale in the fourth quarter 2004. In fact the base tonnage is about 300,000 tons and under certain scenarios it could potentially double up to 600,000 tons. In terms of pounds, the maximum that could be settled that under contract would be 1.325 billion pounds. So it is a very significant contract a $0.01 change in the forward market can have a dramatic impact positive or negative on a mark to market adjustment.

The forward market was higher at March 31 compared to year-end 2004. And as indicated the majority of the mark to market adjustment relates to this very significant contract. As Craig indicated, although we add very good operating results, our operations were impacted by several factors. We had approximately a $1 million of higher electricity costs at Mt. Holly than anticipated. The spot aluminum purchased in the quarter increased costs by over $1 million. We made some of the loss at Mt. Holly associated with the cast offs problem. However we had higher pots at Hawesville and Mt. Holly than anticipated. And the lower volume in pots probably reduced our margins by about $2 million. On a pretty positive note, our share of pretax profits on third-party bauxite and hydrate sales exceeded $5 million in the quarter. That's the equity income line.

At this point I will give you an update on our hedge position. The supplemental accompanying the press release indicates the forward price sales for 2005, '6, '7, and for 2008 through 2010 period as of March 31. We did no forward selling in the quarter. The only change in our hedge position occurred in the first quarter 2005 and as some of the 2005 contracts settled. Entering 2005 we were effectively hedged 49% in 2005, 44% in '06, 35% in '07, and less than 10% in the period 2008 through '10. At this point I'll turn it over to Jack who will talk a little bit more about the operations.

Thank you David break it into four different pieces talk about the smelter operation, the Nordural expansion and our bauxite aluminum operations and a little bit about the markets. Production operations at our four smelters were normal in most aspects during the first quarter. Pots in production was slightly below expectations at Hawesville in Mt. Holly but above it Ravenswood and Nordural. At Hawesville we increased the metal pads in the production cells after completing a study and test that proved that this change would improve the operating efficiencies and energy consumption per pound of metal produced. Even with this increase the forecast plans forecast to meet its annual production and shipping forecast for the year.

Mt. Holly did experience some operational problems at both pot rooms and the cast house missing shipments by approximately 2 million pounds this revenue shortfall was partially made up by producing and shipping a richer mix from Mt. Holly. As Craig mentioned earlier Mr. Holly's power costs were up over forecast due to [Santic-Cooper] paying more for coal and passing that increase on to us. Plant operations at Ravenswood and Nordural were excellent, meeting or exceeding all key performance indicators. Nordural continues to perform at level equal to the best smelters in the world. In April, Nordural also completed negotiations on a new five year labor contract with the various unions represented at a plant.

A little about the expansion. The expansion to increase annual production from the current 90,000 tons a year to 212,000 tons a year remains on schedule and on budget. Start up is still projected in early 2006. The weaker U.S. dollar has caused some price increases. But to date we've been able to cover these increases out of cost savings and other areas and the project continues. We recently announced that an agreement has been signed with the two Icelandic power companies that will allow us access to power to further expand to 260,000 tons a year in 2007 and 2008. This agreement is conditional based on the permitting and development of additional geothermal resources. The necessary funds for this additional increase have not yet been approved by our Board.

A little bit about bauxite and alumina: The recently acquired Grammercy Alumina Refinery, had a very good first quarter only to experience a precipitation tank failure on April 4. We originally responded to inquiries concerning this event, by stating that while not material it could affect production by as much as 2%. This has now changed due to the refinery personnel developing very creative means to minimize the production loss, which is now forecast to be minimal and possibly even zero. Just a little bit about the markets: Some of the customers are reporting a slight slow down in some areas of the market especially automotive and building products. We understand that General Motors is back selling metal units back into the marketplace. Demand for billet is softening in certain regions. Southwest extruders continue to operate at high levels but those in the northwest seem to have slowed their consumption.

Other market remain strong such as plate for aerospace and tooling, common alloy sheet, general engineering plate and rod and cable. The Midwest transaction price has fallen to currently I guess today it was about $0.87 with the Midwest premium now at $0.06 cents a pound. Craig, I'll turn it back over to you.

Thank you Jack. Kent, we'll open up the conference to questions.

[OPERATOR INSTRUCTIONS] Our first question comes from the line of Brett Levy with Jefferies & Company. Please go ahead.

I don't know if this has ever been put out there but with the ramp-up of Nordural is there a rough calculation that says every $0.01 movement in the LME impacts your annual operating income by a certain number?

That will change with Nordural coming on and we do have that kind of a calculation we've discussed from time to time based on our hedge position obviously. I don't know, David, if you have a current number or if we've discussed a current number. Would you like to comment further?

I think maybe a way to answer it Craig we said when the initial 90,000 tons came on it reduced the overall cost for Century by about $0.01 a pound. When the expansion comes on we expect another $0.01 a pound coming out of the overall costs of the Company. And when we get further up to another 260, perhaps up to another $0.01 per pound. So I think that's the relative contribution of Nordural.

Does that answer your question, Brett?

Somewhat. I guess I wanted to sort of start with what was the baseline on that calculation?

Again, I think what you have to do is look at what our hedge position. If you're looking at the total Company; if we're 50% hedged, for example, as we are this year, then the change in the LME in '05 is only going to affect half of the capacity, if I understand your question correctly. David, you have anything to add?

If that's your question, we're effectively 49% hedged. $0.01 change in the LME given the number of shares we have outstanding, approximately 32 million has an EPS impact of about $0.14 per share.

Got it.. To make those penny adjustments as Nordural comes on line. You guys had guided to start up in early '06. When do you think you get to the 212?

By the end of '06, Jack?

Yes, yes. We'll be at the 180 by mid '06 and should be at the 212 by the end of '06.

And just to give us a rough sense as to sort of the relative cost advantage versus other parts of the world, can you give a sense as to the cost of power that you guys are negotiating or some range where other negotiations have been completed for power costs in Iceland?

I don't think that has been made public, Brett, but I think it would be fair to based on LME. And it would be fair to say it's very competitive power situation with other hydro projects that are LME-based.

Got it.. Okay. And then last one really has more to do with kind of you guys had sort of guided to looking forward that you guys were looking to potentially buy alumina assets. How has the hunt gone? And do you still see the alumina market as being as tight going far ward as you saw at quarter ago?

The hunt continues, if I can put that it way. We haven't concluded anything. We still are looking and as we've said, we view this as an area of business we think we should be in as a stand-alone business, not just from an integration standpoint but it has both aspects to it. In terms of the aluminum markets themselves there have been some publications more recently thinking alumina is going to ease up a bit. Right now it remains pretty tight from what we can see. And we think the alumina markets will be fairly tight for the foreseeable future. Like all these other businesses there is cyclicality in it, but I think it will be a fairly decent place to be for the foreseeable future.

All right. Thanks very much, guys. Good quarter.

And our next question comes from the line of Forest Wicodo with BMO Nesbitt Burns.

The 5.3 million of equity earnings for joint venture, I guess largely the bauxite sales and the hydrate sales. Is that a sustainable number going forward or is that sort of a one-time first quarter windfall here? Thank you.

David or Jack, do you want to address that?

The answer is yes, it is sustainable. We are basically - - in fact, if anything, it could even get better because the hydrate market is tightening as alumina does. But we are basically sold out for hydrate. We are selling aluminum bauxite to a third-party customer. We are very close to finishing up a multi-year contract to supply that customer bauxite. So yes, to answer your question, it is sustainable.

I think to just to add to what Jack said on the Grammercy situation. We said when we were initially looking at it and when we acquired that it was more defensive, which I still think is the case. We wanted to assure a certain supply of alumina for Hawesville. And, in fact, our alumina costs in this market is about a push. In other market it could be higher. But we also said there might be some added benefits that we weren't counting on. And that's what we're seeing today is that the operation is a decent one and we do have opportunity there. And we are able to bring in some profitability on the bauxite sale, hydrate sale side. Next question.

[OPERATOR INSTRUCTIONS] And our next question comes from the line of Tony Rizzuto with Bear Stearns.

Thanks very much. Hi, gentlemen. I've only got a couple questions here. First question is to follow up on that chemical grade we hear often about the metallurgical grade but I don't really know a whole lot about the way those chemical grade contracts may be structured. If you can just give me an idea of kind of what they're tied to and in terms of duration and so on and so forth? And generally how the profitability moves over the cycle? Is it more or less stable than --?

They're a very different structure. And I'll let Jack deal with this in more detail. But Tony near not - - typically an LME kind of thing because it's a whole different marketplace. And they're much shorter duration. Many of them I think are just a year-to-year contract. And they have I think tended to be a pretty good profitable area over the longer term but some cyclicality. Jack, do you want to add?

You're right. Tony most of these contracts will be one or two years. Probably two years will be a long contract. There are even some spot sales in this marketplace as Craig mentioned. But it is a good business. And the market has tightened up considerably since we took over the plant and I would say that the average in the marketplace for hydrate has probably gone up $50 a ton in the last six months. So it's a very good market. We're pushing the plant to produce as much as we can. We're constrained on calcination for the 1 million tons. So anything over that it goes into the hydrate markets. And right now it's a very good market.

Jack, where would our main customer base be in that?

As far as location or region probably in the New England area.

But the business - ?

Oh, the business? A lot of it goes into carpet, it goes into backing on a carpet, some of it goes into paints. It's really - - it's a pretty broad market and the one thing about this, Craig mentioned it, Tony, over the years, and I've been in this business a long time, it doesn't vary a lot. It's pretty stable. You don't see the real highs and the real lows in the hydrate business you see in metallurgical grade aluminum.

Thanks very much Jack. Just the other question I had right now was, in regards to your desire to get further backward integrated, and I would - - possibly even long in the alumina market, are there certain geographic regions, Craig, that you think you guys think that look more attractive relative to others? And I wonder if you can just talk about that a little bit? For example, you've got some exposure in Jamaica. How does that look in comparison to other parts of the world like South America?

Well, I think, Tony, you're right, we would look at going into a situation where we're long alumina because then we would be in the alumina business. In terms of the geographic regions, clearly Jamaica has been and remains one of the major producers in the world. And has been pretty steady really in terms of the export situation and so on. Australia is obviously another one although I think for us, although I think for us frankly, opportunities in Australia would be extremely limited. In fact, I'm not sure today whether there really would be any. South America is a potential, Africa is a potential. I think we will be a little, as we've said in these other areas, - - maybe more conservative than some in terms of the amount of risk that we feel we can take. So we'll probably - - we would be and are more focused on areas that are in the business, know the business, and have been pretty steady in it over time.

But you're likely to be more price sensitive? That's certainly an area that I think is a concern for many people given that the market has been so tight. And given that your balance sheet is in the condition that it is. And I think we'd like to see that. Can you give us an idea of some of the parameters would you look at and obviously you can't look at the current pricing situation we have? Where do you kind of, when you look at analyzing some of these other areas what kind of alumina price do you typically utilize in looking at different assets?

Firstly, you're right, we're going to be very careful about how we approach it in terms of balance sheet. And I think we have also said we don't feel that it would be appropriate to add any significant amount of leverage to the Company without additional equity. So we would to have look at how one does that. And in terms of alumina values, to put that it way, we will take a position on the nearby values, if one can move into a position or situation and yield there's open tonnage. And yield some of the current pricing we would put in that our model. But we would not assume that for any length of time. We would go back to a long term value of alumina just as we do with aluminum. We take a position of a long term value. Historically that long term value has probably been in the range of 12.5% to 13% of the LME. I think today, has ratcheted it a bit. And I think the long-term values have moved somewhat. But we would still look for long-term value that would certainly be way below the current spot markets. We would have to justify the investment based on that.

Right. Are you also likely to keep well in mind - - I mean, obviously there's a lot of concern by equity holders given that the stock is down quite a bit off its high.

Right.

That there might be dilution from a situation like this. And how much are you likely to pay attention to the level of the stock price in looking at - -?

It's important. We would have been a lot happier doing something where we were a few weeks ago than where we are today. We look at that time dilution issue very much, Tony. And the level of our share price is an important part of the whole calculation.

Right. Thanks very much, guys.

We have a question from the line of Alex Latzer with Merrill Lynch.

Good quarter, guys with all the disruptions. I wanted to get back to Jack's comments on the market. You kind of quickly went over what you're seeing among your customers. And as it reported Jack, there was a slowdown automotive and what was the other sector?

Building products. It's not as much our customers. What we're hearing - - our customers that we sell metal to really aren't experiencing this. But downstream from them, this is would they're reporting to us, is that building product in automotive is slowing. It done April and it seemed to happen pretty fast.

How would this impact - - I know you guys produce a variety of alloys, too, the P-10, 20's and the others, do you see them therefore your mix becoming a little bit less rich as there's less pull for these sort of sophisticated - -?

I don't think it will change our mix unless this were to continue for some extended period of time. I don't think it will change our mix at all. We're basically sold out.

For the rest of the year.

On our premium products.

Good. Thank you.

[OPERATOR INSTRUCTIONS] And at this time I'd like to turn the conference back over to the management team.

Thank you, Kent. Just a brief summary. Again, we appreciate your continuing interest and participation in our call. I think that on balance we can say that our operations are performing quite well. We add few glitches in the quarter but overcame most of that and I think had from an operating perspective a very good quarter. We have seen a little bit of softening in the market. We're not certain where that's going to go. And it may be fair to say that everybody's sort of getting used to $1900 plus and maybe that was a bit - - probably shouldn't say this, but a rich.

In other words, I don't think we have anything to complain about horribly right now. We're still enjoying reasonably decent marketplace. And the Company is operating well. So at this point we're feeling positive about it. But I would to have say at the same time we do continue to be very focused on our cost control and on improving our basic cost position and our asset base. So that will be our focus during this period. And we will be looking to do more with the Company but I think in line - - in - - really in response to some of Tony's questions we will be very mindful how we do that. So again we thank you for your interest and look forward to our call after this current quarter is completed. Thank you very much.

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