Century Aluminum Co (CENX) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Century Aluminum second quarter 2002 earnings conference call. At this time all participant lines are in a listen-only mode. Later we will conduct a question and answer session. Instructions will be given to you at that time. If you should require any further assistance from an operator, please depress zero, then star, and we will assist you offline. As a reminder, this conference call is being recorded. I will now turn the conference over to Mr. Al Posti. Please go ahead.

Good morning everyone from Monterey. This is Al Posti, Director of Corporate Communications for Century. Welcome to our second quarter 2002 earnings conference call. Before we begin I would like to say that this conference may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

The company cautions that such forward-looking statements are not guarantees of future performance, and may involved significant risks and uncertainties. Actual results may vary materially from those expressed or implied in the forward-looking statements as a result of various factors. Now I'll turn the meeting over to our Chairman, Craig Davis.

Thank you Al. Would add my welcome to all of you for our second quarter earnings conference call for 2002. Gerry Meyers and David Beckley are at Ravenswood today, but they have joined us online, and they will be speaking later. Our results for the second quarter were basically the same as for the first quarter. And David Beckley will go cover this in more detail in his presentation.

The overall weakness in the aluminum price continues to be the driving force behind our results. The most important factor for us today, in today's environment I should say, is that we continue to generate positive cash flow, and that our cash breakeven point will be even lower next year, should the uncertainties in the marketplace continue on into next year. At the same time, we are continuing to progress on our cost reduction program, and Gerry Meyers will cover this in more detail.

David Beckley will now cover the financial information in more detail, after which Gerry will discuss the operations. David?

Thank you Craig. Century reported a net loss of 4.6 million, or 25 cents a share after preferred dividends in the second quarter 2002. If we factor out the lower of cost or market adjustments in both the first and second quarter of this year, we would have had a loss of 23 cents a share in both the first and second quarter, essentially flat performance.

Our second quarter price realizations were up slightly in the, over the first quarter, however the benefits of the higher revenues were offset by higher costs of about 1.4 million pre-tax, which translates to 900,000 after tax, or five cents a share. Had we not incurred these extra costs, we would have been at the consensus estimate of a loss of 18 cents a share. Gerry Meyers in his remarks will elaborate on the specific cost issues.

On a positive note, as Craig indicated, we have been cash flow positive during the first six months, even in a weak environment. Our cash balance was 20 million at June 30. During the first six months of the year, we funded our operations, paid for our capital expenditures, paid our interest and dividends, and generated an extra seven million of cash.

At this point, I'll turn it over to Gerry Meyers who'll talk about what's happening in the marketplace, as well as operations.

OK, thank you, David.

First, a few comments about the marketplace - in the U.S., we are seeing a fairly solid pickup in aluminum demand. This is evidenced by the following.

First of all, bookings for mill products producers, who are our customers, are up dramatically in April and May. These bookings were off significantly in June after a very strong April and May. That's probably not too surprising. Overall year-to-date bookings for mill products are up about eight percent. And there are more concrete signs of this strengthening in demand, as well. Rolling mill lead times have lengthened significantly to beyond the year-end in some cases.

Additionally, rolling slab demand is up as demand from rolling mills for slab from their cast house exceeds the ability of the cast houses to respond. We're seeing the same kind of thing in extrusion billet in that demand for billet is - has strengthened and indicative of strength in the extrusion market. And then finally, the U.S. Midwest premium for primary aluminum is quite strong right now - somewhat over four-and-a-half cents per pound.

In Europe, unfortunately, we're seeing very few signs of positive strengthening in demand. It's been fairly flat. Perhaps some very early signs of a pickup there.

Asia, we understand that demand in China continues to grow approximately eight percent in improvement this year over last year, and in the rest of Asia, there are some areas of strength, mainly export oriented, relating presumably to the pickup in the U.S. manufacturing activity in the first half.

Switching over to operations, we continue to focus on our performance and cost improvement programs. Our objective, as we said in the past, is as follows. Not counting the impact on prices, compared to 2001's average cash cost, our goal is to take out a penny a pound out of our cash cost run rate by the end of 2002 which would equate to about $10 million in annualized reduction. In our last conference call, I indicated that we had made good progress towards this goal in quarter one, and also that we would expect a modest increase in costs over quarter one and the coming - over quarter one in the coming quarters due to hotter weather and the impact that that historically has on our smelter operations as well as slightly higher electricity costs due to higher fuel costs at Mt. Holly.

Quarter two has turned out in this respect pretty much as expected. As David said, excluding adjustments, our pre-tax cost increased in quarter two over quarter one by about $1.4 million or a half a penny a pound.

Running through a little bit more detail as to where this came, at Ravenswood, there was virtually no change in costs from quarter to quarter as Ravenswood continues to operate very, very well. At Mt. Holly, electricity costs were up over quarter one as expected by about $400,000. We had temporary increases in failures at Mt. Holly in May and in Hawesville in June, which increased our cost by approximately nine hundred thousand dollars versus quarter 1. We had an increase in our insurance costs in conjunction with the renewal of our property and business interruption insurance policies at the start of quarter 2. This accounted for an increase of about six hundred thousand dollars in quarter 2 versus quarter 1 and will continue as the year proceeds. Alumina cost increased over quarter 1 by approximately 4 hundred thousand dollars due to the pricing. And then, finally, various cost savings of just under 1 million dollars versus quarter 1 partially offset the aforementioned cost increases. came in such areas as maintenance, manning and, as well as some technical efficiencies.

Quarter 2 was pretty much what we had expected and consistent with achieving our year-end cost reduction targets. Ravenswood and Hawesville are off to a good start, so far, in quarter 3. Mt. Holly is struggling a little bit as they increase current in line with the planned production increase at that plant of approximately 5 percent this year.

One other item I think is worth following up from our last conference call. In that last call I said that we had extended our labor contract at the Ravenswood facility through May of 2006. I also said that we, at that point, now we expected to conclude an extension of the Ravenswood electricity supply, given that we had the labor contract resolved. The labor supply, the contract, the electricity supply has been concluded. We will receive firm power from American Electric Power under a GS-4 tariff through the end of 2005 at rates that are just slightly higher than under the existing agreement that we have with AEP. Craig, I'll turn things back over to you now.

Thank you, Gerry. , we would now open for questions.

Ladies and gentlemen, if you would like to ask a question at this time, please press the one on your touch-tone phone. You will hear a tone indicating that you have been placed in queue and you may also remove yourself from that queue by pressing the pound key. If you are using a speaker phone, we ask that you please pick up your handset before pressing the numbers. Our first question is from the line of Bruce with Credit Suisse First Boston. Please go ahead.

Hi, guys.

Hi, Bruce.

Can you just maybe elaborate a little bit more on Mt. Holly. You mentioned, I think, the pot failures increased a little bit in May, I think. What might you have seen in May, excuse me, in June and into July? And secondly, just on the max-min supply contracts, where do you sit with those in terms of the major supply agreement you have?

Gerry?

Bruce, responding to the situation at Mt. Holly, they typically experience about 5 or 6 pot failures per month, which is usual. In May, I believe that they had like 9 or 10. June, I believe, was just slightly over the normal, and July, thus far, is pretty much at normal. Although they are experiencing some sort of technical inefficiencies, their efficiencies aren't where they have been historically in terms of electricity utilization and what-not. As they are increasing the amperage on their lines, from the beginning of this year to the end of this year they'll go from 215 thousand amps to 225 thousand amps, thereby increasing their by about 5 percent, and which is obviously has a very favorable economic impact when it's done. But it does entail some, some bumps in the road along the way and they're experiencing a few of those at this point.

OK. And, the supply contracts?

I'm not sure exactly what your question is.

I guess you have -- the guy's taking them in in this sluggish environment, or actually you mentioned the U.S. numbers are ...

Oh, OK. OK. You know, our larger supply -- supply contracts at Hawesville and at Ravenswood -- so far people are taking up near the maximum of the range. Demand is healthy from both those customers and we're seeing sort of in the general spot market in which we deal for extrusions and rolling slab and physical delivery of primary -- it's quite strong.

OK. And lastly, just your hedges - which I think for the full year, including I think in the mid-40s -- is that weighted much differently second half, first half, or by quarter, or is it pretty even?

David, why don't you ...

Yeah. This is Dave Beckley. Basically, the hedges were spread out equally throughout each of the quarters, so there's no disparity between quarters of any magnitude.

Though, I do think, David, we have a little bit -- we had a little bit less in the fourth quarter, as I recall. We were a little bit more heavily weighted in the first, weren't we?

Actually, Craig, the fourth quarter -- going into that quarter is 45 percent which is ...

OK. So, we're pretty much the same throughout the year?

Yeah.

All right.

OK. Thank you guys.

OK.

Ladies and gentlemen, as a reminder, if you would like to ask a question, please press the one at this time. We do have a question from the line of with Royal Bank of Canada. Please go ahead.

My sense is that the hedges start to get more considerable as you go into next year, and yet, obviously the along with a lot of other things has just gotten hit pretty hard. I think we're 58 and change cents here today. Can you give some rough sense as to sort of what your exposure is, you know, for the balance of this year, and then talk a little bit about next year? I know that you kind of opened the call by saying, you know, if conditions don't improve that things could be kind of rough.

Well, I think -- this is Craig. I think I'll take part of that and David may want to jump in at the end and add something. But, basically as this year progresses we're becoming, you know, more and more hedged out in terms of total production based on pricing in on month prior, quarter prior. I think what David was basically saying is for the last quarter, for example, going into the quarter, we're basically 45 percent hedged, including . What I was saying at the beginning is next year -- and as we've said at the earlier part of this year -- we're -- we have more hedges in place in 2003. We're about 55 percent hedged out in 2003, including , which means about 25 percent of it is attributable to . The balance is attributable to forward sales, so that we have less exposure starting next year than we had starting this year. The result of that is that our average breakeven point -- cash breakeven point -- is lower next year than this year by -- I think it's around a cent a pound, or maybe a bit more, but somewhere in that range. So we have a little less exposure when we start 2003 than we had when we started 2002. David, do you have anything you want to add to that?

Craig, I think you really basically answered the question. Going into next year, we're between a penny and two pennies less breakeven than we were in 2002 because of those hedges.

The last I checked, the breakeven point was somewhere around 59 cents?

Yeah. In 2002, ...

2003.

Yeah. In 2002, the cash breakeven point is an of around 59 cents a pound. So, you know, it's up to two cents less than that going into next year.

So, it'd be more like 57 in 2003?

Yeah. Somewhere around 57.

All right. And then, sort of anything in a cap ex-oriented, to kind of crank-up the volume, or -- I mean obviously, it sounds like -- it sounds like the demand is reasonably good. Any bottlenecking projects on the docket at this point?

Just the Mount Holly one that Gerry's discussed. We don't have any other major projects for de-bottlenecking.

No. That's right, no major projects. We are sort of consistently tweaking things at Hawesville since we came on the scene, and we're increasing current to the pots. We'll get a little bit more out of that as we go, but it's not by spending money, it's just by working smarter.

And last one, is there, is there any covenants in the bank line that if you were to continue to run kind of at current levels, might be, you know, in question?

David?

I'll comment on that, we've commented on this in our, both our 10-K annual report and our first quarter 10-Q, and we'll comment on it again. Given the fact that we are not earning a book profit, we run into restrictions on paying dividends, and the likely scenario, unless things dramatically turn is, is that we will have to suspend our dividends by the end of the year. That's pretty much it.

All right. Thanks very much guys.

Our next question is from the line of with Merrill Lynch. Please go ahead.

Thanks. Good afternoon gentlemen. Hey, question for you, I have been reading Pechiney, at the Ravenswood rolling mill, was looking at restructuring its operation, perhaps pulling out of some products, emphasizing others, and I was just wondering if they had given you folks any notification of that? Or how that might impact your agreement in supplying them with molten metal?

Well they haven't given us any formal notification that I'm aware of, but ultimately if they reduce their output on the plant, they do have some rights starting in 2003, mid 2003 I believe, if they give us notice, which they haven't yet given us, to reduce their take. And they have to give us a 12-month notice on any reduction in take.

OK, so they have to give you a 12-month notice, and they wouldn't, and then, in either case they wouldn't be able to do such a change until mid '03?

Correct.

OK. And then I didn't catch, you mentioned the pot failure in May at Mount Holly. Hawesville as well in June, I think was mentioned?

Yes, that's right.

OK. Gerry.

And it's, Hawesville's running very well back to, back to normal. These things do tend to happen, you have sort of an actuarial population of, you know, five to 700 pots in a plant kind of thing, and ...

Right.

... it happens, it happens, oftentimes it happens when you're trying to tweak the process or just in response to weather changes, hotter weather kind of thing. So nothing unusual there.

OK. Well how much did that increase the cost by? I got the figure on the Mount Holly, do you recall?

Yes, it was, between Mount Holly and Hawesville was about 900,000, as a result of sort of the pot failures combined kind of thing. OK, together.

I see. Yes, I was just trying to get an indication of what we could expect going forward. Good. Thank you very much.

Excuse me, our next question is from the line of with BB&T Capital Markets. Please go ahead.

Yes, actually it's . Good afternoon gentlemen.

Afternoon.

Question on the SG&A, the decrease from Q's one to Q2, is that, what was that attributed to? And is that sustainable?

What I would refer you to is, refer to the footnotes. What we've done is when we took over the plant, the Hawesville plant, certain costs they included in SG&A, excuse me, yes, in SG&A that we would have included in cost of sales. So we have reclassed those costs into cost of sales. It doesn't change the total profit at all, but it, we're reflecting the cost of sales to be consistent with the way we report costs.

I would expect - really, to elaborate it on a little bit - I would expect our selling, general and administrative costs to be in the $14 million - $15 million range on an annual basis. And obviously quarter-to-quarter, we do have some fluctuations - timing issues. But on an annualized basis, it should be in the $14 million to $15 million range.

OK, thank you. So that - the footnote, though, so that applied to both this year and last year - the reclassification?

It - no, it does not refer to this year at all. It's really reclassing last year's SG&A.

OK, right. But the decline from this year in Q1 to Q2, that wasn't due to any reclass ...

Actually, after the reclassification, our selling, general, and administrative costs are up over the prior year and obviously compared to first quarter, they are down a little bit. But again, that's just timing. They were 4.2 million in the first quarter of this year. and, like I said, I expect them to run in the neighborhood of 14 - 15 million on an annualized basis.

Thank you.

Our next question is from the line of John Hudson with Goldman Sachs. Please go ahead.

Hi, guys.

Hi.

Just a couple of quick verifications - the revolver is fully available - fully plus given the required reserve I mean?

Yes, it is, . It is not currently being used, and as I indicated at the end of June, we had 20 million sitting on our balance sheet. So ...

Right. OK, and then just cap ex for this year and next year still around 20 ?

Yes, it is.

OK. And then just the last question - when you look at your supply contracts, are there any that are potentially up for renegotiation in the next 12 months?

No. They're long-term contracts going out. I think the first comes in, like, 2006 or something in that area.

OK, so the percent is essentially fixed over that ?

Yes. Yes, it is.

OK. All right, thank you.

Our next question is from the line of with Merrill Lynch. Please go ahead.

Thank you.

Two questions, gentlemen - first, with electricity rates having come down out west - I know you have no exposure out there right now, but I'm sure you monitor what's going on. Do you have any fear or concerns about restarts as that may disrupt the market with more supply?

I don't think we're going to see a lot of restarts, , at these prices. Any of the plants out there that power prices are , they're still well above their costs I believe would be well above their selling prices. And again, we continue to see the question if you want to buy forward for any length of time of credit issues that are part of the power sale marketplace today. I don't know how that will affect some of the potential out there - obviously not Alcoa or probably not , but they've already restarted.

I don't know, does anybody else - David or Gerry, do you have anything - any further thoughts on that?

Well, there's also - there's also fairly significant liquidity issues in terms of the power market. I understand as you get past 2003 as a result of some of the - you know, the energy trading fiascos and people withdrawing from those markets and it makes it doubly difficult, you know, not - never mind the difficult sort of market conditions we have right now, but makes it doubly difficult to start a smelter up with that - with that kind of forward market.

That's a good point, Gerry. I mean as we understand it, the power just isn't there. You can't buy it because there isn't much liquidity if you go out, maybe, six months to twelve months.

So, effectively, if I wanted to buy power for the next two years, I might get it for the next six to nine months, but then it becomes hard.

I think it comes - becomes harder after 12 months for two reasons - one, lack of liquidity. One of the major traders of power from that area was Enron I believe. And then secondly, people who do have power are taking a different view of the credit worthiness of the purchaser than they did in the past.

OK. Good, thank you.

You're welcome, Dan.

And as a reminder, if there are any other questions, please press the one at this time.

We have no additional questions. I beg your pardon, we do have a question from Dan with Merrill Lynch. Please go ahead.

I guess I get to ask my second one. What would it take, David, to maintain the dividend at year-end? What would have to happen for you to be able to maintain it?

OK, I won't get into a lot of detail, but because we don't have positive earnings from the time of the acquisition of Hawesville, we're operating against a basket that's independent of any earnings and that basket, essentially, will be filled up shortly after year-end. So, that's the driver and the basket can't be replenished, but we would have to turn into a positive earnings environment where we have positive cumulative earnings from April 1, 2001. And that's not likely in this kind of environment so I think the more likely scenario is, is that covenant relief which, if you know is always a possibility absent any type of change in a covenant likely we would suspend those dividends around year-end time.

So you would have to maintain from April 1, '01, you have to maintain positive cumulative earnings and once you go through them, I mean you'd have to just have huge earning right away in order to replenish it.

That's pretty much true. It's a complicated formula, but that's the simple way of explaining it.

That's much appreciated.

I would hesitate to correct you, David, but I think what's happened is the basket is being emptied.

I meant to say that it's...

When I say its full is, is we're using it up and it won't be available after we've used it up.

Anyway...

That's a question as to whether the basket is half-full or half-empty.

Exactly, I always try to look at the positive side of things and, personally, this one is not a positive. I'm afraid most of you are seeing the glass as half-empty these days, but we still think it's half-full. Anyway, are there any other questions?

We have no additional questions at this time.

Well, if not, then, again, we thank you very much for your interest and your participation. Obviously, the aluminum industry and a good deal of the economy continues to struggle, certainly in terms of pricing. I think for us, unfortunately, what we're doing is we're using the structure we told you we would set up for a down-side scenario. We would rather have our hedges and so on be out of the money the other way around, but the company does continue to generate positive cash flow. We think we have positioned ourselves to go through and it's proving out now to go through these difficult periods. It's not pretty for us and we don't like having negative book earnings, but that's where we are today. Hopefully, the improvement in demand that Gerry discussed starts to show up and we start to see some stronger times for our industry. Look forward to speaking to you after the third quarter. Thank you.

Ladies and gentlemen, this conference will be available for replay beginning today, July 24, at 5:30 p.m. Eastern Time and will run through tomorrow, July 25, at midnight. You may access the AT&T Executive Playback System by dialing 1-800-475-6701 or 320-365-4844 and, for either number, enter the access code 642227. Those numbers again are 1-800-475-6701 and 320-365-3844, with the access code 642227. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.