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Noranda Aluminum Holding Corporation (NYSE:NOR)

Q1 2014 Earnings Conference Call

April 23, 2013 10:00 AM ET

Executives

Gail Lehman - General Counsel

Kip Smith - President and CEO

Dale Boyles - CFO

Analyst

Thomas Van Buskirk - Sidoti & Company

Kevin Cohen - Imperial Capital

Timna Tanners - Bank of America Merrill Lynch

David Katz - JPMorgan

Sal Tharani Goldman Sachs

Bruce Klein - Credit Suisse

Brian MacArthur - UBS

Swaraj Chowdhury - Dalton Investment

David Olkovetsky - Jefferies

Aaron Groffsted - Carlyle

Kevin Cohen - Imperial Capital

Sal Tharani - Goldman Sachs

Operator

Welcome to the Noranda Aluminum Holding Corporation First Quarter 2014 Earnings Conference Call. Hosting the call today from Noranda Aluminum is Kip Smith, President and Chief Executive Officer. He is joined by Dale Boyles, Chief Financial Officer and Gail Lehman, General Counsel. Today’s call is being recorded and will be available for replay beginning two hours after the completion of the call.

It is now my pleasure to turn the call over to Gail Lehman.

Gail Lehman

Thank you, operator. Good morning, and welcome to today’s conference call. Before we get started, I want to remind listeners that some of our comments during this call constitute forward-looking statements related to future events and expectations. Actual results may differ materially from any of our forward-looking statements.

In our earnings release and in our most recent SEC filings, you can find important factors that could cause actual results to differ materially from those in the forward-looking statements. Except as required by applicable securities laws, we undertake no obligation to publicly update or revise any forward-looking statement.

During the call, we will be using certain non-GAAP financial measures. We have provided a reconciliation of those non-GAAP measures to the comparable GAAP measures in our press release, which is available on the Investor Relations page of our website at www.norandaaluminum.com. We will take questions today after the discussion of our results.

Now, I will turn the call over to our President and CEO, Kip Smith.

Kip Smith

Thank you Gail, and welcome to those joining today’s earnings call, now one of the principles of the Noranda culture is that while we don’t control certain key factors that affect our business we do control our response to those factors, for example we don’t control the price of aluminum, but we do control a response to aluminum prices. Likewise we don’t control the weather, but we do control our response to the weather and as you will see, that attitude was incredibly important during the first quarter of 2014. Now usually extreme winter in the first quarter presented operational challenges which caused a sharp increase in our current quarter production costs. There were two weather driven components to that sharp increase in cost, neither of which is structural.

The first was the weather disrupting the operating stability of our plants. The second was a spike in the price of natural gas as severe winter weather in the US caused surges in natural gas demand. As we exited March, we had returned the businesses to stable operational production and likewise natural gas prices have fallen back to trend levels. So despite a challenging start to the quarter, we believe heading into the second quarter we are well positioned to capitalize on robust demand for our key aluminum products. We managed the operating disruptions caused by the extreme weather quickly and stabilized the plants to limit the operational impact to the quarter. We were also able to mitigate the impact of these extreme weather conditions on our liquidity and position ourselves to meet our customers’ needs.

Now let’s begin with a review of our first quarter financial results, these are listed on slide three of this morning’s conference call materials. Total segment profit was $11 million compared to $21 million last quarter and $36 million a year ago. This led to a first quarter net loss including special items of $0.24 per share. Unusual extreme winter weather conditions in our alumina and primary aluminum facilities had a $15 million negative impact to pretax income.

Let’s turn now to slide number four. Here we provided a more detail around the $15 million negative weather impact on pretax results for the quarter. $11 million of that impact was from operations in our alumina and primary aluminum segments. $4 million was from a spike in natural gas prices compared to trend levels. The largest portion of the operational impact was in the alumina segment. Stable operations in Gramercy depend on consistent temperature profiles within the manufacturing process. Now in the past 120 years, there are only five times that first quarter temperatures were colder than they were in Gramercy during this past quarter. January was particularly harsh and was the coldest January in that part of Louisiana since 1978. These unusually low temperatures prevented us from keeping our refinery process at season temperatures within the process at the consistent levels necessary to operate at normal production rates.

As a result we experienced unfavorable usages of key production materials, particularly for bauxite consumption and caustic soda. Just to provide an example, our caustic soda usage was 40% higher than normal in the first quarter of 2014. The impact of this usage at Gramercy was $9 million of the $11 million total. The weather story was very similar in New Madrid as with Gramercy in the past 120 years that only five times the first quarter temperatures were colder than they were in 2014. There hasn’t been a colder first quarter in that region of Missouri since 1979, the impact of this unusually extreme cold weather in New Madrid can largely be characterized in the two items. The first category was the weather’s negative impact on the production of anodes. This impact reduced electrical efficiency, decreased metal purity and increased operating costs.

The second category is a significant increase in maintenance costs and overtime to respond to specific events and process disruptions caused by the extreme cold. As an example, on one extremely cold night, when the temperature reached two degrees Fahrenheit, we logged 17 maintenance calls [indiscernible] alone.

And both Gramercy and New Madrid employees all this superhuman work. Their commitment to the company and to its customers was on full display. In very difficult circumstances they work to execute the actions to keep the facilities operating. We understood the importance to our business and to our customers of combining the impact of these unusually extreme conditions to as few days as possible. That attitude is what kept us as strictly first quarter issue.

The success of our employees' commitment to our customers is evident on slide 5. Here we have quarterly shipment statistics where you can see the relative stability of our volumes despite these weather issues. The first quarter weather conditions were more of production cost issue, rather than an issue for demand and shipments.

We worked very closely with our customers to manage delivery schedules and commitments to them, to minimize the disruptions to their businesses. In fact, the only product where weather meaningfully affected shipments was in [indiscernible] where one of our mills would not run, when it was so cold.

Looking beyond the first quarter we are encouraged by the demand we are seeing for our key aluminium products. According to statistics from CRU, U.S. primary aluminium consumption is expected to grow at an annual rate of nearly 4% through 2015. According to our same CRU data, aluminium consumption in construction application is expected to grow at nearly 5% through 2015.

Now [indiscernible] is one of our key value added primary aluminium products with significant times to residential and non-residential building and construction. [Indiscernible] has significant (finance) [ph] to electrical applications, following little growth in 2013 and 2014. CRU is forecasting nearly 4% growth in electrical applications for 2015. This lines up very well with our timing for bringing a new rod mill online in the 2015.

Despite the increase in production cost, primary volumes were consistent with our expectations. Moving next to the flat-rolled products business, we saw strong demand. In the flat-rolled products business, we are closely aligned with industry leaders in the HPIC and container rigs. Although overall foil and since our consumption in the U.S. is expected to be relatively flat over the forecast period, given the strength of our customers in these segments, we are seeing growth within our existing customer base.

The bottom line is that U.S. aluminium demand is strong and that favourably impacts demand for our products. We have a diverse product portfolio in multiple outlets for our production that provides us the ability to ship nearly everything we produced as a value added for fabricated product. That serves as a foundation for creating value across the commodity cycle.

This stability of demand leads us to slide 6, which is a summary of the current LME price environment. We believe that the underlying long term demand fundamentals of the aluminium industry are (south) [ph]. We believe the strong demand in the U.S. that the principle underlying factor behind higher Midwest premium levels in the first quarter.

Despite strong demand fundamentals, supplier side factors have caused aluminium prices to continue trading near all-time record lows in real terms. That’s one of the big reasons why we retain a passionate focus on productivity.

Slide 7 provides a description of our overall CORE program and how that program works for 2014, through 2016. Just as a reminder, our two previous CORE programs targeted $140 million of productivity and we exceeded those targets. To demonstrate the transformation we are seeking over the next three years, we set the new target at $225 million. Although, some of the operational CORE improvements were hindered in the quarter by unusually extremely weather conditions our key projects remain on track.

On slide 8, we will summarized a few points we believe are helpful on understanding the status of our rate design petition, filed with the Public Service Commission or PSC in the state of Missouri. As we covered in our February 19th earnings call, we filed a rate design petition to obtain a reduced power rate for the New Madrid smelter. Since then a key development occurred on April 16th when the PSC issued orders that allow the case to move forward and established a timeline for how we do so.

So now let’s talk about what can be expected between now and our next earnings call. According to its schedule, the public service commission will hold evidentiary hearings on June 4th through June 6th 2014. Following the conclusion of the hearings, there is a period of legal briefings after which the PSC will issue its decision. Once the PSC announces its decision, the earliest cash flow effective date for any rate change is August the 13th.

This case is extremely important for the New Madrid smelter and for our company. We appreciate the support we received from consumer groups as we seek to achieve a reduced parity. But it’s important to remember that the aluminum outcome is up to the public service commission. Although the public service commission has established a schedule that allows for a timely decision in this case, this is no indication regarding how the PSC might view the merits of our rate request.

At this point I’ll turn the discussion over to Bill Boyles for a deeper look at the current period results and a review of our liquidity and financial position. Bill?

Dale Boyles

Thanks, Kip and good morning everyone. Beginning with slide 9 we have our trailing 12 month trends on realized Midwest transaction price, primary aluminum net cash cost, revenue and segment profit.

Lower LME prices have certainly had a negative impact on our operating results in the period presented. In addition, high energy prices at our New Madrid smelter have also been a factor, accounting for $13 million of the decline in segment profit between the trailing twelve months ended March 31, 2013 and March 31, 2014.

As Kip indicted earlier, the extreme winter weather disruptions to our operations lowered our segment profit by $15 million including $4 million of higher natural gas prices. When you exclude the $0.03 per pounds of weather impact for the trailing 12 months ended March 31, 2014 our net cash cost of $0.82 per pound was the same as the trailing 12 months ended March 2013, which demonstrates our focus on driving productivity in spite of the circumstances.

Let’s move to the components of the segment profit for the first quarter of 2014. Please turn to slide 10. We reported $11 million of total segment profit this quarter consisting of $8 million from our integrated upstream business, $11 from our flat rolled product segment, less $8 million of corporate cost. Excluding the extreme weather impact of $15 million, our integrated upstream profit would have been $23 million in the first quarter of 2014.

Turning to slide 11, our upstream results with a product of 142 million pounds of total primary aluminum shipment at a net margin of $0.05 per pound. The average realized Midwest transaction price rose $0.05 per pound compared to the fourth quarter of 2013 from $0.90 to $0.95 on higher Midwest premium prices. Excluding the impact of the weather our margin per pound would have been $0.16, $0.04 higher than Q4 2013 and our net cash cost is $0.79 per pound would have been $0.02 lower than the first quarter of 2013.

Turning to slide 12, you’ll see two bridges which describe our performance from fourth quarter of 2013 to the first quarter of 2014. At the top of the chart you see that higher average realized prices contributed $7 million of higher segment profit, and higher value added premiums in volume contribute another $2 million.

We realized $3 million of savings from our core productivity efforts in the first quarter as we continue to structurally reduce our cost. These items offset higher medical and workers’ compensation cost of $3 million and numerous other accrual timing items totaling another $4 million. Our net cash cost was $0.90 per pound in the first quarter of 2014, excluding the impact of the weather of approximately $0.11 per pound which includes higher natural gas prices, would have put our net cash cost $0.01 higher in the fourth quarter of 2013 at $0.78 per pound.

Turning to slide 13, you will see two similar bridges which describe our performance from the first quarter of 2013 to the first quarter of 2014. At the top of the chart you see the bridge from a segment profit year-over-year. There are numerous puts and takes here, but a couple of things stand out.

First, non-realized prices lowered our segment profit by $16 million. Second, saving from our CORE productivity program contributed $9 million increase in our segment profit.

Now let’s walk through how segment profit reconciles to net income excluding special items. Please see slide 14 in the deck. There’s little difference between segment profit and EBITDA excluding special items this quarter. Depreciation and amortization expenses excluding special items were $22 million while interest expense was $13 million in the first quarter, the combination of those items brings us to a pretax loss of $24 million in the first quarter 2014 including $15 million of weather related impact.

Our annual effective tax rate for 2014 is approximately 32%, with a discreet investing of restricted stock in the quarter that resulted in an effective rate of 30% for the first quarter. Our after tax loss is $16 million in the first quarter with a loss per share of $0.24.

Now let’s move to our first quarter cash and financial management results. Slide 15 bridges cash from the end of the fourth quarter 2013 to the end of the first quarter 2014.

Cash used in operating activities of $20 million in the first quarter 2014, compared to cash usage of $2 million in the first quarter of 2013. Keep in mind that segment profit was $26 million lower in the first quarter 2014 than in the first quarter last year primarily the result of lower realized pricing of $16 million and the weather related impact of $15 million. It is normal for us to use cash for operating activities in the first quarter because of the seasonal bill in our working capital.

In the first quarter 2014, we invested $17 million in operating working capital which is trade receivable, inventories and payable, trade payables. This amount is lower than the $38 million of cash used for working capital in the first quarter 2013.

In the first quarter 2014, we built less inventory as demand was solid and our production was impacted by the extreme weather conditions. The lower working capital usage reflects our response to the first quarter issues, as we were focused on mitigating the impact on our liquidity.

First quarter 2014 cash flows also included $5 million of payments made in connection with the company wide workforce reduction, we implemented in December 2013. During the first quarter we invested a total of $13 million of capital expenditures for sustaining and gross projects, compared to $19 million in 2013.

Of the $13 million invested in the quarter, approximately $10 million was for sustaining capital and $3 million was for growth capital. For the trailing 12 months we’ve invested $66 million in capital, of which 52 bas been sustaining capital. This amount is in line with the $50 to $60 million of sustaining CapEx expectations for 2014 that we communicated in our February earnings call.

While this amount is below what we'd like to see on sustainable basis which is more in the $65 to $75 million range, it is the amount we believe, we can afford to spend in the current LME environment and still operate reliably. Produced $6.5 million on project specific financing arrangement, already in place for our CORE expansion in Jamaica, the expansion will continue throughout the remainder of the year.

We ended the quarter with $51 million of cash and a $140 million of availability under our ABL facility, combined, that is $191 million of total liquidity at the end of the first quarter.

Other items of note include a revolver was undrawn at quarter end, except of outstanding [indiscernible] of credit. We had no material funding increase before 2019 and we have no performance maintenance covenants under our credit facility, except for the requirements to maintain a minimum level of availability under the facility and certain circumstances.

In summary, the extreme weather, winter weather conditions in the first quarter disrupted operations and resulted in higher production cost. We were successful in limiting the impact of the weather on our total liquidity, [indiscernible] our working capital and capital spending during the quarter.

Turning to the second quarter, I want to provide a remainder of factors impacting our business and results. Remember that peak power rates kicking at New Madrid in June, that would be expected to increase our second quarter's net cash costs by $0.03 per pound, relative to the first quarter.

From a cash flow perspective keep in mind, as we overlap the issuance of the 11% note last year, we have higher amounts of interest payments due in the second to fourth quarter each year. Based on debt balances and interest rates in place at the end of the first quarter 2014, we expect our second quarter cash interest payments to be approximately $21 million similar to the fourth quarter of 2013.

We didn’t make any estimated tax payments in the first quarter, but we may make two quarterly estimated tax payments in the second quarter.

Finally, while our financial performance in the first quarter was outside our expectations, we have a portfolio of core productivity projects that we can execute to keep us on target for the 2014 expectations that we originally communicate on our February call.

We believe our flexible capital structure combined with our focus on managing controllable costs and working capital provides us with a solid liquidity foundation, as it works through the headwinds presented by this portion of the commodity cycle.

With that, I will turn it back to Kip.

Kip Smith

Dayle thank you. Ladies and gentlemen thank you once again for the chance to speak with you about Noranda. (Both in) [ph] our call today, I'll review the key takeaways which are detailed on slide number 16.

Unusually extreme winter weather conditions negatively affect the productions and cost in the first quarter. These conditions affected our primary aluminium businesses and reduced total segment profit by $15 million.

The impact of net cash cost was a non-structural increase of $0.11 per pound. We managed those conditions to limit their impact in the first quarter returning our facilities to normal operating levels by quarter end.

Demand for key aluminium products continue to be strong during the first quarter with a positive outlook for the second quarter. Overall shipment volumes continue to be stable as we work closely with our customers to manage delivery schedules and commitments to minimize the disruptions to their businesses. We continue to advance activities that are part of our $225 million three-year CORE program to structurally lower our net cash cost and support our financial sustainability. Most notably, the [indiscernible] has established a schedule which will allow a timely decision on our rate request.

Finally our financial structure is designed to support our operations across the commodity cycle with approximately $191 million of liquidity and no significant funded debt maturities until 2019; our financial structure provides the flexibility we need to execute the actions necessary to support our financial sustainability.

We don’t take that liquidity for granted though, we're very focused on preserving our liquidity and it’s another reason why we remain passionately focused on productivity measures as the means to transform our cost structure.

Now that concludes our prepared remarks for today. Operator I’ll turn the call over for questions.

Question-and-Answer Session

Operator

Thank you Mr. Smith. I will now open the call to questions. (Operator Instructions). And our first question comes from the line of Thomas Van Buskirk with Sidoti & Company; your line is open.

Thomas Van Buskirk - Sidoti & Company

The first question I have is -- I know that operations are back to normal as of the end of the quarter, but are there any lingering effects from any of the process disruptions or anything that could affect results in the current quarter or near future, you know either from raw material costs that are going to be higher or any other maintenance or other expenses that are going to be in tails from what happened in Q1?

Kip Smith

Thomas, thanks for the question. We don’t expect any material impact ongoing from the weather. We really believe that we have contained us to our first quarter issue and so we're proceeding ahead with plans at the end of the quarter. We're stabilized and running well.

Thomas Van Buskirk - Sidoti & Company

And then just a quick follow-up to that is, the working capital build was less than usual as you said in the first quarter. What should we expect in the second quarter? Will we see maybe a little bit more than usual there to catch up?

Dale Boyles

Thanks a lot for the question, but, yes our typical seasonality as we build working capital on the first quarter and we kind of maintain that normally in the second quarter. We might see a little build this quarter because we didn’t build as much in the first quarter because we used that inventory to meet all our customer demands. So, it could be a slight increase there in the second quarter, but nothing materially it's fixed at.

Operator

Our next question comes from the line of Kevin Cohen with Imperial Capital; your line is open.

Kevin Cohen - Imperial Capital

Good morning, and thanks for taking the question. I guess, first, what’s your outlook on the Midwest premium, it’s picked up a little bit in just the last week, another quarter cent per pound kind of (defined a lot of the step) [ph] actually what’s your guidance to be on that?

Kip Smith

We’ve been quite open about our view on the Midwest premium. We believe that if you’re going to look at any fundamental prices, it’s always driven by a number of very complex factors. But in terms of just the fundamental price trends and the like of what we believe if there is one factor that’s worth more focus than any other factor, its fundamental demand. And so when you look at the U.S. demand picture, the data that we see from CRU, our first quarter results and our customer demand that we saw, we believe that, they are oversimplified that the U.S. demand picture is solid and we would point to that as the spot for Midwest premium.

Kevin Cohen - Imperial Capital

And then from my follow-up question, more on the finance side, how do you see liquidity turning when you think about year-end ’14 versus the start of the year?

Dale Boyles

You know as I was talking about our working capital, you’ll see those build ups early in the year but we are using the cash but when you build the working capital, you get that availability and the ABL facility. So we are doing everything we can and everything that in our tool box to maintain and preserve our liquidity for the rest of the year and throughout this part of the cycle. I’m not seeing any material changes unless there’s something that was unexpected.

Operator

Our next question comes from the line of Timna Tanners with Bank of America Merrill Lynch; your line is open.

Timna Tanners - Bank of America Merrill Lynch

Just wanted to check a few housekeeping items on the SG&A line, it looks like a significant decline from your run rate last year. So just wondering how to think about that going forward? Is that sustainable?

Dale Boyles

I’m sorry. What was the question? Was it SG&A?

Timna Tanners - Bank of America Merrill Lynch

SG&A was a lower level than your run rate last year so I’m wondering if you could discuss the sustainability of that and how to think about it going forward please.

Dale Boyles

Well most of that what you’ll see is the headcount reduction or reduction in force that we did in December of '13, so you’ll see those savings through the remainder of this year.

Timna Tanners - Bank of America Merrill Lynch

Okay so that’s a good run rate for the rest of the year.

Dale Boyles

Yes.

Timna Tanners - Bank of America Merrill Lynch

Okay, then also you had talked about a $10 million contribution perhaps once support and rod projects were done, can you give us an update on how those are proceeding?

Dale Boyles

I am sorry, $10 million, I didn’t understand the $10 million, but the rod mill, the rod mill is progressing on schedule and on budget and that does come online in May of 2015 and we look forward to bringing home that new mill.

Operator

Our next question comes from the line of Dave Katz with JPMorgan, your line is open.

David Katz - JPMorgan

Good morning thank you very much for taking my question. So in the filing on the PSC, it said on behalf of Missouri Retailers Association, but the issue in the case is whether (Enron’s) [ph] other customers are better positioned with Noranda’s (indiscernible) but reduced contribution to Enron’s fixed cost by gambling on Enron’s providing those revenues during increase in off system sales, other considerations are nothing more than (red herrings) [ph]. This implies and I think some of the other filings that you guys have made implies that if the rate case doesn’t go your way, you will shut down. Are you guys definitively saying that if the rate case doesn’t go your way, the company is not set up to survive long term and that a shutdown will be forthcoming as a result?

Kip Smith

Dave, its Kip here, thanks very much for the question. Just a little bit of context as I answer this question. Having a competitive power rate is vitally important for New Madrid as it is for any smelter. You know if you just look at the history, we all know from experience that there were 32 smelters about 25 years ago, there were 15 smelters six years ago, and there’re nine today. And as we have looked at those shutdowns, we haven’t seen one that did not cite uncompetitive power as the primary cause or a primary cause of the closure and so obviously the reason why we filed a petition with the Missouri Public Service Commission was we believe we’re very experienced with that process and we believe it’s the best process for us to get a sustainable rate, a rate that’s competitive and one that’s sustainable. So, we’re very-very committed to that process and now just as far as the specific answer to your question, this is a judicial process and we’re right in the middle of it, so I’m sure that you can understand that we’re just not in a position to speculate on or comment on specific outcomes, the case as we go forward but if you look at the PSC schedule, they anticipate a decision on July the 30th and obviously we’ll have a lot to say about our power immediately after that.

David Katz - JPMorgan

Okay and then as my follow up, between now and July 30th, as time goes on and perhaps they get in other documentation, they’ve already gotten documentation from Orchem and from Continental Cement as well as by representatives like Marsha Hefner, Continentals, all opposing the position that you guys have taken, Continental Cement in particular raised an argument which is somewhat similar to yours which is that you guys are suffering and could be forced to shut down or at least be stressed as a result of the higher rates that you’re paying but Continental Cement’s position is that if your rate is lowered and theirs is increased, they would be in a similar position. How do you anticipate addressing concerns that are raised like that throughout the process?

Kip Smith

And again Dave, thanks for the follow on question, one of the big reasons why we’re in the (mouth of) Missouri, in the Public Service Commission processes, they are the body that designated the balance, the concerns of all the consumers in the state and so we have watched this process work, we have participated in this process, we have confidence in it, we’re committed to it and so on July the 30th, I think we’ll get an opportunity to see how the PSC has managed all the issues well within the rate case.

Operator

Our next question comes from the line of Sal Tharani with Goldman Sachs, your line is open.

Sal Tharani Goldman Sachs

Kip, there has been a quite a bit of excitement in aluminum sheet industry both the body and weight of the aluminum sheet for the automotive industry. I was wondering if you had the capacity or the availability to actually join forces with somebody to get into that field who on the downstream obviously don’t go the downstream but just a joint venture we have seen some other relationships develop by other sheet producers in the US and I am wondering if you have looked into that at all?

Kip Smith

Sal, thank you very much for your question. First of I will have to tell you as the Chairman Aluminium Association, I'm very pleased to see this particular development having the overall increase in demand in the U.S. for the industry is something that is certainly a positive for the overall industry. And that being for Noranda right now we have core markets that where we’re really a flow producer and we've not really been a sheet -- we’re not really a sheet producer. So while this is something we would obviously entertain if we felt there was an appropriate opportunity at the moment we don’t have plans to be participating in that market. We are however participating in the automotive space through specially alloy materials like [indiscernible] which allows for light weighted -- we're very focussed on the light weighting trend in automotive and we are participating in that through the speciality allows that allow part reduction, single unit casting that sort of things. So this is a great development but our assets are really more tailored towards the foil markets.

Unidentified Analyst

Okay. And lastly, can you go over your guidance you had given, I just wanted just to make sure we're on the same page in terms of excluding that $0.11 or whatever impact from the cash flow side on the, from the weather was, what are your expectations for 2014, excluding also the rate case if you don’t get that?

Dale Boyles

Well, Sal, if you look at the impact of the weather on our trailing 12 months, that’s about $0.03 on our net cash cost. So while that was below our expectations in the first quarter with the weather impact, we do believe we have a number of actions in our CORE program that we can execute, that will keep us or put us back on track for the remainder of 2014. We’ve talked about power and what we built into our guidance there for the year and this approved expedited schedule that we received recently within a couple of weeks of what we expected in putting our expectations in our February earnings call.

Operator

(Operator Instructions). Our next question comes from the line of Bruce Klein with Credit Suisse. Your line is open.

Bruce Klein - Credit Suisse

Hi. Most of my questions were answered, guys. But the -- I was -- I guess as far as comment on the robust demand, is that sort of driven by transportation bottlenecks and what’s going on in the premiums or is there anything, you mentioned constructions or anything else you characterized there, why things are sort of robust on demand side?

Kip Smith

Well, certainly Bruce again, thanks for the question, and good morning. We -- a portion of it we do believe is the quality of our customer base, we do believe that the construction activity has had a significant impact on the HBAC side as we disclosed. But we’ll, but that’s really when you look at our markets they tend to be a bit more GDP driven and so I think fair to just to kind of keep an eye on that in particular the building and construction arena.

Operator

Our next question comes from the line of Brian MacArthur with UBS. Your line is open.

Brian MacArthur - UBS

I just want to go back to Sal's question to make sure I understand this. So first quarter we did $0.79 cash across ex the $0.11. Second quarter we are going to be up a bit $0.03 on par but you'll probably get some savings to offset that. Now at the beginning of the year you gave guidance for cash costs with a volume of 75 to 78 and now you’re saying the power contract if it is, if you win which goes in August 13, that was kind of close to where you thought it would be because obviously in third quarter it's going to jump a lot with the rate thing, if you don’t get it. And that was all factored in to get to your 75 to 78 for the year. If you sort of look at it, you’re running at 80 the first two quarters, I guess you go up for a little bit in the third quarter and then you win your rate case not to bring it back to 75 to 78, and if you don’t get the rate case, we're going to be somewhere up around 84, 85 is that the right way to think about it?

Dale Boyles

Yes, I think that would be the correct way. You know, the pillar we built into the latter half in the back end of 2014, as we, I think we built into our expectations, the August first date and right now we’re seeing from the PSC was on implementation date of August 13th. So a couple of weeks there it would shift a little bit.

Brian MacArthur - UBS

And you're assuming that’s $0.04 credit for the back half of the year or $0.08 in run rate doing the power rate, that’s sort of what you did?

Dale Boyles

That’s correct.

Operator

Our next question comes from the line of [indiscernible]. Your line is open.

Swaraj Chowdhury - Dalton Investment

Hi, I am trying to find out what is the key drivers from the LME price right now? Is it Chinese over production or is it the economic growth or if more than 40% of the smelters are still in cash losses, I am trying to understand what is -- why they have not shutdown yet? And what in future is going to determine the LME prices? Because that is the maximum sensitivity to your earnings after your cash costs.

Kip Smith

Good morning and thanks for the question. I think I would just refer back to the commentary that I made on overall demand. There is different demand profiles around the globe. Clearly the situation in China is one that affects global demand. And I think that most of the times Chinese demand and supply becomes the $64,000 question in terms of the global LME price. So over time we still believe that demand fundamentals for the aluminium industry are solid and we believe that when you look at the situation in China, clearly with where the pricing is today, since they are the primary player in the smelters that are in the fourth quartile, they have the most smelters that are largest percentage in that quartile that would be suffering from this.

So that equation remains one that is just very, very difficult to forecast, very, very difficult to predict and if I just turn that back to Noranda, that’s why we just pound our strategy wherever we are in the cycle. We just have to drive productivity year in and year out because of the uncertainty associated with the LME, where it’s been and where it is today. And look, the answer here for us is just the transformation that we have talked about in our cost structure to be able to make our way through a difficult period and be sustainable because as you look at the construction of new smelters there, they’re still building. And those are brand new technologies. So we’ve got to be able to compete with that to both survive and prosper.

Operator

Our next question comes from the line of David Olkovetsky with Jefferies. Your line is open.

David Olkovetsky - Jefferies

I have only one question and it relates to the co-located electricity utility. I mean you guys have a pretty deep pocketed parent and you're already quite vertically integrated. Have they considered purchasing that asset? And also with the new rate proposal, would that asset be if I guess cash flow positive and/or positive ROI et cetera?

Kip Smith

David, thank you very much for the question. Just as a note of a brief clarification, as a publicly traded company we obviously don’t have a parent but we do have a very significant shareholder in Apollo management and having been around Apollo and Apollo owned companies now for coming up on 10 years I can tell you that their investment decisions are things that they keep very close to the chest and so I couldn’t comment and wouldn’t have any knowledge or what their plans might be in that regard.

And then as far as again the viability of that facility in the face of our new rate proposal, we’re in the midst of this public service commission process and we would not comment on that. But again thank you very much for the question.

Operator

Our next question comes from the line of Aaron Groffsted with Carlyle. Your line is open.

Aaron Groffsted - Carlyle

Hey guys. I just had a question on the potential outcomes for the rate design petition. In that is the ruling that we’d hear on July 30, is that sort of is it binary, is it sort of there is -- are you going to get the sort of -- is it -- did they rule that you're getting the full effect or you’re getting nothing or can there be something in between where they say [indiscernible] $0.08 but you get $0.04 or something like that. Any colour on that?

Kip Smith

We can give a little bit on colour. I am going to ask Gail Lehman our General Counsel to do so.

Gail Lehman

I mean the PSC is the ruling body on that, so they leeway in what they can judicate. And we have our [indiscernible] which is pretty clear you can see from the public documents but we don’t know. In the end what they’ll decide and as Kip has said quite clearly, we don’t want to speculate on what their ultimate decision will be.

Aaron Groffsted - Carlyle

Is there sort of precedent, I am sure you have looked at all the precedent sort of cases, has that sort of happened I guess whether it’s something in the middle or it's always been sort of yes or no?

Gail Lehman

There really isn’t a whole lot of precedent; the obviously the more usual cases [indiscernible] brings the rate case to get a rate increase and so it really isn’t as usual for rate payers to bring a case like this, speaking of rate reduction. So truthfully there really isn’t a whole lot I can help you out there but with past cases and what’s been done.

Operator

Our next question comes from the line of [indiscernible] with Morgan Stanley. Your line is open.

Unidentified Analyst

We saw some very strong Midwest premiums in first quarter. So I was just curious in your downstream segment, the flat-rolled products, were you able to pass through those to your customers?

Kip Smith

Our typical contract, they are structured and step out strategically. We don’t try to if you will, profit on the Midwest or the LME, we really are focused as a matter of strategy just pass that through to our customers. And so since that’s the way we structure our contracts, we generally are able to pass that through.

Operator

Our next question is a follow up question from the line of Kevin Cohen with Imperial Capital. Your line is open.

Kevin Cohen - Imperial Capital

Just in regard to the CORE program. Do you guys expect that to be somewhat rateably received over the next few years or do you expect that to ramp up just given it seemed like the first quarter number was a bit on the modest side?

Kip Smith

I have to apologize; I missed the first part of your question, my apologies.

Kevin Cohen - Imperial Capital

No problem. The CORE program, do you guys expect that to be received kind of rateably over the next three years or do you expect that to ramp up just given the first quarter number. It seemed like it was somewhat in the lighter side just given the aggregate program.

Kip Smith

Yes, I think the -- first off thanks again for the question. When we look at the CORE program, we actually build out quarter-by-quarter program, so while we wouldn’t necessarily expect it to be rateable because there are major projects like power that would come in and hit specific quarters. So we really keep our program based on a three year level, because there is some moving around these things from year-to-year. So that’s probably the best guidance that we can give but the big project that’s obviously going to impact or one of the big projects is going to impact this year will be the power.

Operator

Our next question comes from the line of Sal Tharani with Goldman Sachs. Your line is open.

Sal Tharani - Goldman Sachs

Just a quick question, in your press release you mentioned that your revenues was down year-over-year because your alumina, primary aluminium flat-rolled power segments are linked to LME which is obviously not a new thing. But I was wondering are they linked to LME or are they linked to LME Trustee Midwest Premium? So is it the transaction price that they are linked to or you are only the alumina sales are linked simply to the LME price?

Kip Smith

Just to the LME, Sal.

Dale Doyle

For the alumina.

Kip Smith

For the alumina.

Sal Tharani - Goldman Sachs

And how about the flat-rolled?

Dale Doyle

As Kip said that’s a pass through with the Midwest premium and our flat-roll business.

Operator

I am not showing any further questions in the queue at this time. I’ll turn the call back over to Mr. Smith for any closing remarks.

Kip Smith

Thank you very much. And ladies and gentlemen thank you all. This does conclude our teleconference. We deeply appreciate your interest in Noranda and appreciate your commitment and time today to listen to our call. Thanks again and you can disconnect your lines now.

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Source: Noranda Aluminum Holding Corporation's CEO Discusses Q1 2014 Results - Earnings Call Transcript
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