Century Aluminum Co (CENX) 2006 Q2 法說會逐字稿

Welcome to the Century Aluminum Second Quarter 2006 Earnings Conference Call. [Operator Instructions]

I'd now like to turn the conference over to Mike Dildine, please go ahead.

Thank you. Good afternoon everyone and welcome to the conference call. For those of you joining us by telephone, this presentation is being Web cast on the Century Aluminum Web site, www.centuryaluminum.com, with an accompanying slide presentation. The slide presentation is also available on PDF form on the Web site.

The following presentation, accompanying press release, and comments include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements relate to future events and expectations and involve known and unknown risks and uncertainties. Century's actual results or actions may differ materially from those projected in these forward-looking statements.

These forward-looking statements are based on our current expectations and we assume no obligation to update these forward-looking statements. Investors are cautioned not to place undue reliance on these forward-looking statements.

For risks related to these forward-looking statements please review Annex A and our periodic SEC filings, including the risk factors and management discussion and analysis sections of our latest annual report and quarterly reports.

In addition, throughout the conference call we may use non-GAAP financial measures. Please refer to the appendix which contains the reconciliation to the most directly comparable GAAP measures.

I'd now like to introduce Logan Kruger, Century's President and Chief Executive Officer.

Thank Mark and hello everyone. Welcome to Century Aluminum's conference call covering the second quarter of 2006. The second quarter was very positive for Century. We were very pleased with our operating performance, our financial performance, and our progress towards our growth objectives.

Joining me today are Jack Gates, who will discuss the operating results, and Mike Bless will provide comments on our financial performance.

Also with us in Monterey this afternoon are Bob Nielson, our General Counsel, Steve Schneider, our Chief Accounting Officer, and Shelley Lair, our Treasurer. So let's get started.

We are pleased with Century's second quarter. Our operations performed well and we obviously benefited from the continued strong markets. Importantly, we made meaningful progress on our growth strategy. Aluminum prices traded in the 2500 per ton range during the quarter, well above long-term averages.

Market fundamentals remain positive. I'll have further comments on the market in a moment.

I am very pleased with our operations across the board during the quarter and would like to recognize the excellent performance of all the people in our operating facilities. Jack will discuss this in a few moments.

Our financial performance during this quarter was strong. Revenues of $406 million and the operating income of $100 million were at all time high levels. We drove meaningful leverage to the bottom line, while focusing on all aspects of our business, particularly productivity and cost control. Mike Bless will have additional comments on those.

Turning to labor, the steel workers ratified a four-year agreement covering 600 hourly workers at the Hawesville, Kentucky plant in May. A three and a half year proposal covering the 580 hourly workers at the Ravenswood, West Virginia, plant is being voted on in this week.

We continue to progress our growth objectives. In Iceland our current capacity expansion from 90,000to 220,000 tons were made on schedule and on budget. And as you know in this business that's an unusual event.

In addition, we accelerated our [inaudible] expansion to 250,000 tons per year at Nordural to the fourth quarter of 2007. As we have mentioned, we are now finalizing the capital [inaudible] for this 40,000 ton expansion.

In June we announced the signing of a memorandum of understanding with the two Icelandic geothermal power producers for our Greenfield smelter at Helguvik. I've commented before this is a great site and exactly where we would like to place the smelter. With this important milestone accomplished we are moving forward judiciously on this attractive investment.

We remain committed to growing our bauxite and alumina business. The changing nature of this market could cause an opportunistic and [inaudible] approach to the growth. To this end, in May we entered into a joint venture agreement with Minmetals Aluminum Company of China to explore the potential of developing a bauxite mine and associated 1.5 million tons per year alumina refining facility in Jamaica.

My comments on the market reflect the views of key commentators as well as our own insights and observations. As we have moved through 2006, all regional economies continue to perform well -- an unusual event. In North America, Western Europe, and Japan [inaudible] industrial product grew by about 3% in the aggregate.

China continues to perform to the upside of all expectations, turning in GDP growth of over 11% for the first half with inflation still under control. Expectations are for this rate to continue for the balance of the year.

More importantly, industrial production growth in China was nearly 20% last month and is forecasted to be at least 16% for the year.

The developed Asian economies, principally Singapore, Taiwan, and South Korea are performing well, and immediate results have been outstanding with rises in GDP growth in quarter one.

These forecasts do not contemplate any type of serious impact from the current geopolitical disruptions. And obviously it is unclear what the effect will be on the various regional economies if the oil price and all of its derivatives were to remain at or near current levels for any many-- for amounts of time.

Against this backdrop, worldwide aluminum demand remains strong with the consumption of up to 6.1% during the first half of this year. Demand appears to be strong across all regions and markets. China, where consumption grew up at 20%, was a major contributor.

It is interesting to note that this increase in demand is higher than the well-publicized year-to-date production growth in China of around 18%. The 6.1% growth in global consumption is at the high end of the long-term forecasts, which continue to be in the 4 to 6% range.

I must note, it's quite interesting to me that 6% consumption growth implies new metal primary acquirements of 2 million tons per year or another way of saying it, 7 new 300,000-ton smelters each and every year.

On the supply side, industry forecasters see upwards of 5 million tons of production coming on-stream during the three-year period 2006 to 2008. This figure includes greenfield and brownfield projects as well as the restock of a portion of the previously added capacity in China. Against this, of course, about 700,000 tons of closures have been announced and with more potentially coming.

Bottom line, these thoughts indicates an approximate 4% average of annual growth in global production through 2008. For 2006, markets are forecasted continue to remain in deficit.

The most significant change in the last several months has been the market conditions for alumina. The stock price in the Far East has declined from over $600 per ton to less than $400. Chinese production is up significantly -- some reports estimate more than 50% year-to-date. But we have previously commented that a production level 13 million tons for alumina this year is possible in China.

This trend is requiring a significant increase in imported bauxite into China, which has interesting implications for that market going forward.

The world market for alumina appears to be pretty much in balance for the second half of 2006, and may lead to surplus during the next few years.

Obviously, we saw a lot of movement in the commodity price during the quarter. It goes without saying that the prices have been through unusual swings, with over $780 separating the high and low closing prices during the quarter.

But there was not much change in the fundamentals when all is said and done. In fact, the aluminum cash price actually increased by $100 over the quarter to $2,591 per ton at the finish.

The underlying strength in the market is confirmed by the physical premiums, which strengthened in all major regions in quarter two versus quarter one. The Midwest premium at about $0.06 per pound and the European duty paid premium at $113 per ton are reflective of robust market conditions.

At less than 30 days supply, inventories continue to be reasonably tight in all regions, again reflecting the fundamental strength of this market. IAI inventories have decreased by over 250,000 tons since January 2006, and alumina inventories have gone down 75,000 tons since their high in March 2006. Japanese [inaudible] are down 100,000 tons since the beginning of the year.

The recent inventory drawdowns are especially significant given that summer is generally a period of weaker demand for the aluminum industry. As a producer we are not seeing any evidence of a typical summer slowdown.

I now turn this over to Jack Gates who will discuss our operating performance.

Jack Gates; Thank you Logan. The second quarter operations continued the solid performance of the first quarter. Our three U.S. smelters produced 2.7 million pounds more than was forecast in our second quarter business plan.

The Hawesville's smelter performance remained very good in all areas even while the labor contract negotiations were ongoing. As Logan mentioned earlier, a new four-year labor contract was negotiated and ratified by the Hawesville steel workers during the quarter.

Our Ravenswood smelter had an excellent quarter achieving most of its performance goals. A new three and a half year labor contract is currently being voted on this week by the Ravenswood steel workers.

And Mount Holly's second quarter safety performance continues the excellent first quarter trend and Mount Holly's copper and melt production set a new six month record in the first half of the year producing 2 million pounds more than the same period last year.

The Nordural expansion, which takes that smelter from 90,000 tons to 220,000 tons, continues on schedule and on budget even with the unfavorable impact of currency exchange.

The startup of the last group of pots began on July 17 and should be completed in fourth quarter. While these have some of the normal startup issues with new equipment and inexperienced personnel, overall the startup has been very successful.

The budget for the phase 5 project, which will increase Nordural's annual production to 260,000 tons a year, is being finalized and will be in the $125 to $130 mid million range.

The earthwork has begun and orders for most of the long term delivered items have been placed.

Completion of the project and the [inaudible] first pots is projected in late '07.

The St. Ann bauxite mine second quarter performance continues to improve over the same period in '05. Safety performance improved by 30% over the same period last year. The capital being sent to upgrade the mobile equipment phase is progressing well with approximately 8% of our new equipment now on site.

This equipment will have a favorable impact on our long-term production capacity and mining cost. Mining and shipping performance continues at the record first quarter pace with an improvement in cost. We are increasing our onsite inventory back to a more normal operating level recovering the loss caused last year by the unusual hurricane pattern in Jamaica. This additional inventory will also be used to support higher sales as we go forward.

Safety performance at the Gramercy alumina refinery is showing significant improvements in '06 over the same period last year. The refinery reached 1 million net hours without loss time injury.

Total alumina production in the second quarter improved 4% over the first quarter of '06 with a 7% improvement in production costs driven primarily by lower energy costs.

Couple of comments about the marketplace. The second quarter was robust in demand for premium products. The billet market is extremely tight on supplies with two of our larger customers ordering on the high side of their covenants. All of our 2006 billet capacity is committed.

Demand for high purity aluminum to support the aerospace and the cosmetic markets remain strong. Demand for physical metal and the higher costs of transportation is supporting the Midwest premium in the $0.06 per pound range that began in '05 as opposed to the historical $0.04 or $0.05 per pound.

The LD hit a record high on May 11, with a cash [inaudible] price of $3,275 per ton. Shoot that down to market it receded but remained steady and well supported at $2,400 to $2,700 per ton range.

Mike Bless will now review our financial performance.

Thanks very much Jack and thanks everybody for joining us this afternoon. As Logan mentioned we're really pleased with the Company's performance across the board.

Excluding the mark-to-market adjustments, basic EPS came in at $2.01 and diluted EPS at $1.92. Obviously the major difference between basic and diluted this quarter is the impact of the convertible notes.

Just to take a step back since we haven't had to talk about this in the last couple of quarters to remind you, the accounting for the notes is pretty straightforward, only the premium of the principal and not the conversion price is included in the diluted share calculations. When you take the settlement of the notes themselves, it's notes settled in cash up to the principal amount or organic conversion price. And on the premium over the principal amount is settled at the Company's option in any combination of cash or common shares.

The results we just talked about compared to $1.30 in the first quarter this year and $0.78 in the comparable period the last year -- second quarter obviously. Plus excluding the mark-to-market adjustments in those periods. And the results in those periods were the same, both basic and diluted.

Net sales grew about 17% sequentially Q1 to Q2 this year, obviously. That was the product of about 9% volume growth and a little over 8% principally due to price increases.

On the volume side, direct shipments were up slightly sequentially Q2 over Q1 and up a little more than 1% versus the same quarter last year.

On a telling side, our business in Iceland, our volume in Iceland, was up almost 60%. As Logan mentioned the new production has come on on schedule and on time.

The 80% approximate price increase compares to about an 11% change and the one month lag Midwest price over the period. Just to remind you, obviously, that impact that you're seeing is the impact of our forward fixed price contracts. And to remind you one more time we talked about this before, but most of our volumes, our business in the U.S., is priced after a one-month lag of the Midwest price. So the prices that you're seeing this quarter that just ended obviously are March, April and May, [inaudible] prices we'll see in Q3 obviously June through August.

Gross profit, up $2 million on a $59 million sales increase, driving a conversion margin sales to gross profit of about 53%. And as Logan said we're very pleased with the operating leverage we've been driving.

Gross margin up from 22% last quarter to almost 27% in the second quarter.

As we spoke on the call last quarter, e needed to purchase some alumina on the spot market for the second quarter given that our production in our U.S. plants remains above our plan and we did that and that cost us about $3 million in the second quarter, about what would have been our normal alumina contract price for that volume.

SG&A in the quarter of a little over $8 million was inline with expectations and below Q1, therefore driving about a 60% conversion of sales down to the operating income line.

As you see, we recorded another mark-to-market loss this quarter, though obviously much smaller than in the first quarter of this year.

Just finishing up on the income statement, the effective tax rate, 31.6% as reported. Right in line with what we've been expecting and backing out the mark-to-market charge the effective tax rate was 33.0%.

Just turning quickly to cash flow. Free cash flow for the quarter of $46 million was up nicely from Q1. Just a couple of the items that impacted it. Account receivables, as you've seen if you've had a chance to look through the cash flow statements, use about another $20 million of cash for the quarter that was all to the impact of the market.

Our days sales outstanding and receivables are absolutely flat quarter to quarter.

Frank did a great job on inventory management. [Inaudible] actually up slightly quarter to quarter. Other uses of cash during the quarter, tax things obviously, and the settlement of the ensuing derivative contracts.

Turning to the next stage, we've shown you this chart before and we've now updated it for forward price sales, for the balance of this year obviously starting at July 1 going forward and for the next couple of years in the aggregate period 2011 to 2015.

To remind you, the additional line here is produced from our two large financial forward contracts which have provisions in them that call for doubling of the volume in each monthly period in which the market price is in excess of the contract price.

And for purposes of this chart we continue to show those volumes doubling with the period obviously as the forward crisis in each of these periods are above the contract price.

Turning to page 11, we've showed you this chart again. I think it's helpful just to remind us about the Company's total hedge position. Taking the volumes that we talked about on the prior page, the forward price sales, and adding to them those other amounts that in effect provide a natural hedge for the Company. Just detailing those quickly. Obviously our alumina for our portion at Mount Holly and for our smelter at Ravenswood is purchased at the percentage of the OME.

Electricity, our power contract in Nordural, is purchased as a percentage of the OME. And our business in Norduarl, our trolling contract is priced as a percentage of the OME.

So when you add all those up, as you see here, about half of our volume over the next couple of years is in one way or another hedged to the markets.

And now Logan, has a couple of concluding comments.

Thank you Mike. In summary, Century continued to perform very well during the second quarter. Strong operations and robust market conditions yielded encouraging financial results. We secured a new four-year labor agreement at Hawesville and we will hear soon from the union concerning our proposed labor agreement at Ravenswood.

Finally, we are continuing to make very good progress on our growth objective. At Nordural, our expansion to 220,000 tons remains on schedule and budget for the fourth quarter of 2006. We accelerated our further expansion to 260,000 tons into 2007, and have already commenced earth moving for this project.

We entered into a memorandum of understanding to secure energy for our greenfield project at the favorable Helguvik site.

We entered into a joint venture agreement as well with Minmetals of China to explore the potential for developing bauxite and alumina resources in Jamaica.

And lastly, we continued to look at other growth opportunities.

We believe that we are well positioned for the second half of this year and beyond. I'd now like to open up the discussion for your questions.

[Operator Instructions] [Carlos Dealba] from Morgan Stanley.

Yes good afternoon. Yes, I have three questions. The first one is how does the new forecast of aluminum pricing coming down because the ramp up in capacity out of China changes your plans in terms of expanding into the refining area?

Do you want to take them one at a time there Carlos?

Yes, that would be great.

Carlos, thank you for your question. I think clearly, as we've said before, we would look at each potential opportunity or project on the basis [inaudible] after a logic, that will give us favorable returns on a cash risk adjusted basis. And we actually leverage our expertise to generate more value.

Obviously, with that we'll also look at the financing. So we don't look at what the spot price was in on China and how they are going down, we look at what we think the long term prices are and how we can position ourselves to make a good margin in that business.

Okay. And just hypothetically, in the case the spot price does comes down, are you going to arrange-- I don't know, just speculating 200 to 250, how does that would change your strategy with Gramercy and internally supply alumina?

I think Gramercy has performed very well and it meets the needs of the range that you're talking on. So I don't see any change in our strategy. And I think Jack has reported that Gramercy has continued to grow in its performance.

And my final question would be, do you have any update on where the power negotiations at Hawesville [inaudible] are as well as the-- any update on the rate increase case at Ravenswood?

Yes, we can deal with both. On the Hawesville site we're really covered for the whole all of 2006, Carlos, as we've spoken about before. Going for 2007, we're 27% unpriced but we believe we'll settle that with the next couple of months, probably into the fourth quarter.

On the longer term for Hawesville, we're making some progress but it's a larger number of parties involved and we will report probably early next year how the progress is being made with the Big River Power Incorporate. So that discussion will continue. That's really our longer-term plan. We're still very positive about it. But it's going to take a bit more time to produce the results that we can report on.

At Ravenswood we just recently had the-- a rate adjustment approved and it is a minor impact to our total cost. We're very pleased about that and as you well know the Ravenswood power prices are the most capable in the U.S.A.

Okay, thank you very much.

Terrence Ortslan from TSO and Associates.

Thanks. [Inaudible] In ideal circumstances will that be in [inaudible] that you will develop the thing and what do you see the potential of the joint venture in terms of possible volumes and the time periods that you see Jamaica realizing for you?

Thank you for that question. I'll ask Mike or Jack to comment as well. We're at the pre-feasibility conceptual engineering level so we doing complementary drilling and testing for the bauxite reserve. We've got a large area which some work has been done on and after we've done that preliminary work over the next 18 months, I would say, up to 18 months, we then can evaluate what size or project we would have.

Normally, we targeting somewhere between a 1 million and a 1.5 million ton per annum alumina producer. So, it's early days and we will take it in stages and probably then plan on phases as we get more knowledge of it.

The early infrastructure support that [inaudible] is it something that only has a scale by you're not going to worry about it in terms of [inaudible].

I think that's a good question Terry. We have to look at the infrastructure as well. I think that's part of the equation in the pre-work -- can the infrastructure support that and support [inaudible] amongst other things as you quite rightly understand.

So it's really that. We're very happy to be in Jamaica. We're happy with the support of the Jamaican government as well as our partnership with China Minmetals. We think it's a good partnership for the longer term. But it's early days and they're very early projects.

Can I ask a question on the balance sheet please with respect to the convertible senior notes and the Nordural debt and [inaudible]. Is this the way you will maintain the balance sheet over the-- some other source of long-term money will come in and replace all of this.

In that context, I would like to know what the sensitivities are on the income statement on a-- on the basis when change in interest rate.

Hello, this is Mike, good question. Let me take it in pieces. Number one, as we sit here today, based on the Company's operations and seeing out into the near future obviously-- let's say through the 260,000 ton extension at Nordural which we'll complete next year, we think the Company's capitalized adequately and correctly. So, just sort of doing a status quo you wouldn't expect to see any change now.

Obviously going out as we look at how the greenfield site at Helguvik will get financed, depending upon market conditions there and what type of facility we build in the first stage you're likely to see a need for some kind of external financing and it's early days. We're obviously looking at it at this point but to start talking about what portion will be equity versus debt and the rest is just too early at this point in time.

From a sensitivity standpoint, to answer your question, our U.S. debt obviously both the converts and the senior notes are fixed rate so there's no sensitivity on interest rates there. Really the only sensitivity, major sensitivity we have, we have some IRVs that get remarketed but the major sensitivity, as I think you're probably heading, is on the Nordural debt and therefore-- you know, there's a principal balance right now is something just under $300 million, about $280 million, and so to your question, you know, undertake this one change either way is about $3 million, a little less than $3 million pre-tax on the income statement.

Thank you. Thank you for your time.

Timothy Hayes from Davenport.

Hi, good afternoon. Just a question on the startup for Nordural. Was there any one time/unusual costs that were incurred to get the expansion going that would not be-- costs that would not reoccur going forward?

Tim, I'll let Jack answer that but the answer in shortly is no. But Jack may want to comment.

There's no extraordinary costs. We did have new equipment. We had some issues with new equipment but no. The answer to your question is no.

Timothy Hayes. I guess you're safe for lining all the pots. I mean you have to go in and line all the new pots during the quarter whereas that's an expense that you would not have to do in the few quarters that are after that.

That was planned.

Those are the kind of expenses that we were thinking of.

You're talking about for phase 5?

With the current expansion, right.

Current expansion we're taking it to 220,000 tones, those pots are already lined.

And when were those lined?

I think we probably lined the last pot in the first quarter.

Okay. So no other costs are in the second quarter just to get geared up for the expansion then?

No. Just a matter of storing pots down.

Okay.

Tim, I think maybe some of the confusion comes-- you're trying to make-- I think you're doing apples to oranges here. The pot lining of the new products here gets put in the capital base. So there's no wash during the P&L in the current quarter or whatever quarter you're doing that.

Is that a different accounting treatment than the-- I thought pot lining had to be expensed.

No.

Not for the initial investment.

Okay. All right. Thanks.

[Operator Instructions] [Dan Whalen] from Bear Stearns.

Yes, hi, everyone. Just you mentioned with alumina prices coming down I was wondering if you're seeing any signs of the prices for refinery assets coming down if you were to purchase assets. And if so, is there anything that would prevent you from walking away from a joint venture in terms of breakup fees or anything of that nature?

A joint venture with China Minmetals in Jamaica, there's no cost there. We started a lot-- I really want to put it in the right context. The pre-feasibility, conceptual engineering, those sources are putting multiple money into the prework. Once we've done that work we're going to decide are you want to go to full feasibility to execute the project? So there's no breakup costs. It's really, I think, the right way to approach this. Obviously, we've seen the stock prices in the Far East market come off but that was expected and we've commented on that some time before.

But I do want to add that I think the increased cost into the whole business process metal and the refined alumina are still higher and so that the longer term pricing will not be as low as they were before.

I'm sure you guys are presented with possibilities all the time in terms of acquiring assets. Have you seen any softening in acquisition prices on the refinery side?

Dan, we really wouldn't comment on that. I think basically value assets are on what you think is the long term pricing for that particular commodity. And on that basis I think commodity prices for metal from people who view the market somewhere between 1600 and 1900 but you have to make your own view. We don't make comments on that.

Okay. Great, thank you.

[Operator Instructions] And at this time we have no further questions. Please continue.

Well gentlemen, thank you very much everyone for joining us today. We've had a very good quarter. We appreciate your time on a busy afternoon and we look forward to speaking to you again soon. Thank you.

Ladies and gentlemen, that does conclude our conference for today.