Century Aluminum Co (CENX) 2002 Q3 法說會逐字稿

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Ladies and gentlemen, thank you for standing by. Welcome to the Century Aluminum third quarter 2002 earnings performance conference call. At this time, all participants are in a listen-only mode. Later, we will have an opportunity for questions and answers with instructions given at that time. If you should require assistance during the conference call, press zero followed by star. As a reminder, your conference call is being recorded. I would like to turn the call over to your first speaker.

Good morning, everyone. This is Al Posti, Director of Corporate Communications. Welcome to our third 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 involve significant risks and uncertainties. Actual results may vary materially from those expressed or implied in the forward-look statements as a result of various factors. Now, I'll turn the meeting over to our chairman, Craig Davis.

Thank you, Al. I'd like to welcome everyone to the conference call. Everyone is here in Monterey today, Jerry Meyers and David Beckley will be speaking later. Our results continue to be driven by the depressed primary aluminum prices. For example, last year, our average realized price through the first three quarters of the year was approximately 73 cents a pound. This year, through three quarters, the average is approximately 68 cent a pound. In the third quarter of 2002, our realized price is about 2 cents a pound lower than it was in the second quarter of this year. The important point to reiterate is that we do remain cash flow positive. We've gone through this with everybody before, but frankly, in today's world, this is our major, our major point at this time. Our hedge strategy continues to work and underpin the company in poor economic conditions. In addition, we do continue to Milwaukee progress on the cost reduction program and Jerry Meyers will discuss this further. Finally, as we look to 2003, we believe there are too many uncertainties to allow for an accurate prediction or perhaps any prediction of next year. However, again, the one certainty we can comment on is that we are more hedged for next year than we were for this year, approximately 55% going into 2003 at very strong prices, therefore, our cash break-even point is lower by 1 to 2 cents per pound in 2003 than it was in 2002. So if the economic conditions continue to be weak, we are well situated to deal with that from a cash flow standpoint. I will now turn it over to David Beckley.

Thank you, Craig. [inaudible] Century Aluminum reported a loss of 7.8 million, or 40 cents a share after preferred dividends. Including the lower cost of market [inaudible] to adjustment, the write-off of direct costs associated with a prospective acquisition and a benefit of reduction of estimated income taxes, century's loss was 32 cents a share. Our loss in the third quarter was higher than the second quarter principally due to lower price realizations associated with the weak aluminum market. On a positive note, we continued to make progress on our cost reduction program, and we generated significant positive cash flow during the quarter. As we have indicated in the past, our cash flow break-even point on 2002 on an l & b basis 59 cents a pound, and as Craig indicated, it will be in 2003 perhaps around 57 cents a pound because we have about 10% more sold forward in 2003 versus 2002. As a final point, we announced that we are suspending our common and preferred dividends for the reasons indicated in the press release. At this time, Jerry Meyers will comment on the operations.

Thanks, David. Good afternoon, everybody. Before I talk about operations, I would like to make a few remarks regarding what we're seeing in the marketplace. After seeing some very positive signs in quarter two, quarter three's turned out to be somewhat of a disappointment. Our direct customers are the rolling mills, extraction operations and die castors in the United States. After seeing an increase in demand and strong improvement in new order statistics for the semi-fabricator in the March through May timeframe, we have seen new orders fall back to weaker levels in the June through September period as the United States manufacturing sector has slowed, once again, combined with the slower summer season. Physical demand is reasonable. It's not robust, however. Rolling mills are still largely booked out through the end of the year, and the other semi fabricating product sectors have shorter lead times and somewhat more open capacity. Non-residential construction and non-automotive [inaudible] markets remain quite soft, while there is solid demand in automotive and residential construction ever. The Midwest premium for aluminum dropped off to 4 cents a pound. At that level, it was not attracting sufficient aluminum into the United States. The premium has strengthened to over 4.25 cents, which is relatively strong. In Europe, we hear that demand continues to be soft, perhaps even further weakening somewhat over the past several months. In Asia, Chinese demand continues to grow strongly as does demand in South Korea and Taiwan. The rest of Asia is not quite as strong. It's spottier since their demand is more export oriented. Physical premiums for primary have improved somewhat in Europe and Asia and inventories have flattened out and decreased slightly of late. This apparently -- these apparently positive indicators are due to technical factors as they are to fundamental demand.

Switching now to operations, our Ravenwood plant continues to operate steadily this year at levels, which are significantly improved over recent years. Has is operating well and setting production records monthly as its new line 5 continues to increase through-put. Mount Holley continues to struggle a bit as it has been gradually increasing the current to it pot top lines to increase output by 5% over the course of 2002. We are continuing the heavy focus on our performance and cost improvement programs. To reiterate, our cost objective is as follows. Not counting the impact on aluminum prices, compared to 2001's average cost, our goal is to reduce our average cash cost run rate by 1 Clinton cent per pound by the end of 2002. So we exclude from our cost objective target the benefit that we are getting from lower aluminum prices because of their linkage to lower aluminum prices. These savings would be an equivalent of $10 million in annualized cost reduction. We continue to make good progress on this goal. As an indicator, comparing quarter 3 of this year to quarter 3 of 2001 and adjusting cost of goods sold for the impact on the price of alum that as well as removing the non-cash items of lcm adjustments and depreciation, we've improved our cost position of half cents per pound. These quarter three this year versus quarter 3:00 of last year. Using the same comparison to look at quarter two of this year versus quarter 3:00 and adjusting for a $300,000 one-time charge that we incurred in quarter three, which related to the sale of our rolling mill three years ago, we've improved costs by approximately half a million dollars or about .2 cents per pound from quarter two to quarter three. In addition, we have increased our hot metal production every quarter this year. Compared to quarter four of 2001, quarter three saw an extra 6 million pounds of production from the pot line. That's an increase of 2.3% versus the final quarter of last year. In summary, despite some adverse surprises this year, such as significant, unexpected increases in insurance costs, we are on track to achieve our goal and deliver some very significant cost improvements. Craig, back to you.

Thank you, Jerry. We'll now open it up for questions.

Ladies and gentlemen, if you have questions, press the one on your touch-tone phone. You'll hear a tone indicating you've been placed in queue and may remove yourself. If you are using a speakerphone, pick up your hand set before pressing any numbers. The first line is Bruce Kline with credit Suisse first Boston. Go ahead, please.

Hi, guys.

How are you doing?

I noticed you wrote off some expenses related to the potential acquisition that didn't happen. I wonder if you could talk about when that was, where it was, what your thoughts were there. Secondly, if you could up date us on the status of your on your pension funds that would be helpful, and lastly, just the pension issue with regard to their rolling mill, whether that's performing or if they gave you any indications?

That's a lot of questions. What was number one again?

It was acquisitions and pensions.

Anyway, I'll take two of those. This is Craig, and then David will talk about pensions. In terms of the acquisition as we have indicated all along, it is our strategy to continue to expand the company to reduce our cash cost position. We have been working on an acquisition, which is outside of the United States, and we're quite close to concluding it this year. However, the equity markets did not hold up for us, and anything we do at this point as we indicated we would do with equity. We, therefore, have pulled back from that. Is still our view that we hope to succeed with that acquisition, but not in this market, and as a result, the expenses that we were capitalizing in connection with the acquisition we've decided would be prudent to go ahead and expense them this year rather than hold them over next year. In terms of pension a, at this point, they take 100% of their requirements from us. They have a min/max contract that ranges of 23 to 27 million pounds, and I think they're in between the mid-Max or closer to the Max. They continue to perform 100% of their agreements with us. We have nothing further in that respect. We have had their preliminary indication for next year, which is something that many could under our contract at Ravenwood, and it is only preliminary, and it is their indication that they will be taking about the same for next year as they have taken this year. So at this point, it's basically business as usual.

Do you know how they're performing operationally?

Well, I think, again, we are next door so we get some information, and of course, they have -- they have had some public statements in this regard. I think they continue to lose money at their rolling business here. I think they continue to struggle a bit, but as Jerry's already indicated, these are tough markets today, especially on some of the transportation areas where the higher margin products have existed in the past. They put a lot of capital in the business. I think their effort is still to continue to improve it, and it is their basic position in aerospace and automotive in this country. We just saw on the Reuters this morning where they acquired the rolling assets of chorus, which also -- and according to the release anyway, it's directed at their strategy of continuing to expand in the basic transportation areas, aerospace and automotive, so we assume that's still their strategy, and if they're going to produce in this country, this is where they'll have to do it, at Ravenwood. As to any other information, which we don't have any other, they're still on their strategic track, but they are struggling a bit in terms of the fact that they're currently losing money, I believe, in their rolling business here, and I think they're working with the union, and I don't know where that is today. I assume there will be some information soon because we know they were having discussions.

Craig, just to remind us, there is a 12-month notice they need to give you if they reduce?

If they were to reduce the take which they couldn't do before mid next year, they have to give us 12 months notice, which they haven't given us, and when they do it, they can reduce by, I think, it's half, and at that point, we would then sell the balance of the metal in the open market. From our perspective, it's a good contract. It's a contract that we clearly wish to maintain. It's good for both parties. It's molten metal and we both share in the savings. From the stand such point of Peshenet-ph, since that was built next to a smelter in terms of their utilization of metal, it really wasn't designed to take frozen metal in great amounts. I was designed to use metal from next door. For both parties, it's a positive arrangement. In terms if they reduce or reduce their output in the long term and reduce their take from us, of course, we would sell the metal. We would have a slight erosion in margin, but basically, we would sell the metal into the open market.

Okay.

David, do you want to deal with the pension issue?

Yeah. I will comment on pensions. This is a topic important to all of us in industry. We have had a lo of discussion, and actually, we have seen, you know, a deterioration in our asset values and our pension plan, particularly our hourly plan, and it's not been that significant, but nevertheless, there has been a deterioration, and also we're looking at potentially a lower discount break, where you discount the employee liabilities. What that means to us on a preliminary basis is probably worst-case scenario, it would increase our pension expense by up to $2 million in 2003, and also our funding probably would be impacted by up to $2 million, so it's not a major issue for century.

With respect to the plans now?

You know, at the end of last year, the hourly plan, which is only significant plan that we have was over funded, and it is under funded right now, but, again, you know, you don't -- because of the funding status of the plan, we don't have to make any contributions in 2002, even with the deterioration in the market value of the portfolio, so we're in good shape, and probably what we will do is contribute up to $2 million into the hourly plan, even though we are not required to do so in 2002.

Okay. Thanks, guys.

Any other questions?

We'll move now to the line of Brad Levy of Royal Bank of Canada. Go ahead, please.

Can you talk about a little bit about working capital at this point, and also, can you talk about your break-even point for 2004 as your hedges are now set up in terms of [inaudible] price?

Well, David will do the working capital. In 2004, we are not as heavily hedged as you, well no. Our aluminum hedge is there and then we have another 10%. I think today, 2004 is around 35%, so as a result of that, if this market were to last into 2004, we would be less hedged and our break-even point would go up. I don't have a number off the top now, but it clearly would be higher than next year, and it would be, I assume because the HEDGE is 35% instead of 45% would be somewhat higher than 2002. Woe would not look at this point to hedging into that timeframe at these prices. That's something that we wait on and if we see improvement in the market, which somewhere over this period of time and I think close now into the third year of a down market in terms of pricing. We would then go back in and do the same kind of program that we did for 2002 and 2003.

In terms of working capital, I see no fundamental changes in our working capital. The greatest impact in our working capital is the, you know, the [inaudible] price because we buy aluminum as a percentage and we book our receivables based on [inaudible] basis, when we have relatively low prices, we have lower investment and working capital. I would like to see our working capital go up because of high aluminum prices, but our working capital is fairly stable.

Can you talk about where those are going as far as you guys are concerned? The last one was, were Peshenet-ph to pull out of their deal over a two-year period, my sense is you go into the stock market, and the last I tried to calculate it, I was between a $4 million and $6 million impact if you had to do that. If the math on that still right?

I think the impact is not that great, and David will come back maybe if he has any further thoughts on that, but in terms of the market we fell into, we probably fell into the spot market. Right now, we're pricing into the spot market. We sell physically next-door, but it's unpriced. We're pricing out Peshenet-ph contract against the [inaudible] with some adjustments for the nature of the contract, both metal and so on, so that that part wouldn't change dramatically, and in fact, what we really did in terms of Ravenwood and metal is somewhat, it is spongable, we decided to underpin for 2003 Ravenwood as it is our highest cost plant, and so the hedge, the major hedge we have in place next year is a financial hedge against Ravenwood for 80,000 tons, and that wouldn't change whether we were supplying Peshenet-ph or a physical market into a spot market. David?

I don't have a lot more to say, Craig, other than the fact that, obviously, the contract we have with Peshenet-ph is subject to both parties. If we were to sell it to another party, we would lose some margin and it wouldn't be to the extent you indicated. I wouldn't say it was per penny per less per pound that it would impact us.

I think that's right. It would be less than your 4 to 6, but I would certainly be sure of the exact amount. It would be where we were in terms of hedging.

The last question was energy cost guidance.

Energy, as you know, our energy contracts are mostly fixed. Ravenwood is fixed through 2005. Mount Holley comes up in the end of 2005, and that's being worked on today in terms of renewal contract for Mount Holley. At this time, 2005 through 2006, our energy contracts are across the board mostly fixed. There's a small piece opened here and there, but mostly fixed.

It's --

It's only going to be slightly higher for next year?

Okay, slightly higher, slightly.

Thanks very much, guys.

you're welcome.

We have a question in queue from the line of Wayne Atwell from Morgan Stanley.

Thank you. Could you give us some detail on how you're going to cut your costs?

How we are cutting them? How we're going to cut them?

How you have and how you will?

How we have and how we will? We're working on a broad spectrum of areas, Wayne, and the costs are coming out of things like top life. A smelter spends a penny a pound, penny and a half per pound on the pot liner. If you improve pot line, you take 2 cents per pound out of your cost. That's been a target for us. Electrical efficiency, improving the current efficiency and the amount of raw energy used per pound of aluminum, again, a 2%, let's say 5% improvement there is worth a penny a pound. 5% is big improvement in the gap. We're making progress certainly at Ravenwood this year, expect more next year. Making progress in Tylersville, and we hope that would accelerate next year. Maintenance spending is another significant area that we're targeting and have had success with, expect to have more. We're looking at -- we've been working on head count reductions, primarily at Hallsville. We felt there was and still remains some surplus in there from when we purchased the facility and made -- I think we've probably taken a net of something like 40 or 50 people out of the operation since we took it over. We have -- we're also looking at cash product mix rationalizations, which work both from a net cost savings standpoint, as well as a margin maximization standpoint. That's most specifically at Haassville. There's some tweaking at Mount Holley, as well. We have done a significant amount of work on our raw materials contracts. Unfortunately, I think as was alluded to, the good news at Ravenwood electricity, we have it for 2005. The bad news is half way through '03, it increases slightly, probably .6 cents per pound at Ravenwood cost, a minor increase really considering the electricity markets we were dealing with. Aluminum was a significant cost reduction both in terms of the fact that it's not linked to [inaudible] and also the fact that when we -- the percentage of [inaudible] that we're paying is for the new contract that we signed last year is quite favorable, but that's sort of off the top of my head running the gambit of the kinds of areas that we are work on and will continue to do so.

Thank you.

We have a question from the line of Jim Curry from Silver Point Capital. Go ahead, please. Mr. Curry, your line is open?

My question has been answered.

As a reminder, ladies and gentlemen, if you do have questions, please take this opportunity now to press the one on your touch tone phone. We have a question in queue from the line of Joe Lemnowitz from Prudential Investment.

Thanks. Can you give us guidance on fourth quarter capex and pull your capex for next year?

Going into the year, we anticipate spending about $20 million in 2002 and we also anticipate spending 2 million next year. Based on where we are today, we will be hard pressed to get to 18 for 2002, but we fully expect to spend $20 million next year.

Have you made a decision about whether you will put in a cast house at Ravenwood yet next year?

Yes, we're working on that, and we think it's prudent for the longer term to have a simple cast house. It's within our capital budgets. We would be probably complete with a project like that by midyear next year, perhaps earlier.

So 5 million is the right number to use for that?

It's not bad.

So excuse me, 5 of the 20 would be the cast house.

In other words, since we're going to do this, we have looked at our overall capital program and squeezed capital out of other areas in order to accommodate the cast house.

Okay. I think the way you guys in the past have given us guidance in terms of break-even, you included the dividends in there. With the dividends out, I would think that the break even for next year on an [inaudible] basis has gone down. Can you tell us what the break even is with your hedge book next year?

Yes. It's 57 cents, the cash dividend by itself divided by 40 million pounds is, you know, roughly 6/10 of a cent. That's the impact of suspending our dividend.

So 57 cents gets you to break even?

Around there, that's correct.

And last thing I have here, can you just remind us -- well, I guess two things. Can you tell us what the bank availability was at the end of September, and can you also tell us if there are any other issues as it relates to covenants?

There are no issuances to covenants and our availability was $55 million at the end of September.

The line is still undrawn, obviously.

Okay, thank you.

We have a question from the line of Rabi [inaudible]

Two questions, one is your estimate for cash taxes, if any, and in 2002 and 2003, and then secondly, you know, the impact of the Kaiser aluminum bankruptcy, what do you currently see about having an impact on the impact?

Cash taxes were zero?

Cash taxes, our anticipation is that we will be paying no taxes at all.

The Kaiser bankruptcy, we don't see any impact. The supply contract we have with them has been affirmed in the bankruptcy proceeding, and right now, you know, there's supply and we're taking, great. Thank you.

We'll next go to the line of Daniel Rolling with Merrill lynch.

Thank you. Craig, just a bigger picture question for you because I know you think about the industry a lot. There's been a lot of discussion about new smelters coming on, and my question is do we really need them in the short run, and also at availability of aluminum? Clearly, you have a contract, but do you see tightness in the aluminum market over the next year or so?

This is a large question, Dan. No, I don't think we need them right now. In the short run, I'm not sure we're going to have a lot. As you well know, you don't build a new smelter on six months or a year's notice. There's quite a bit of advanced planning and the permitting and so on, the raising of the capital. What's out there, it's already in the process and will come on. We have some expansions and so on.

The big issue of late, of course, has been with respect to China and the expansion of China, and there were a lot of publications early on saying how many smelters and how much capacity China was going to add. We would not pretend to be experts on China, by any means, however, we have, obviously been looking at the various information reports and so on that are available, and it would appear that maybe it was a bit overblown in terms, I think at one point, we saw there were going to be 4.2 million tons of new capacity coming on in China alone by 2006, which is over a period of years but at the same time, when we started reading the reports more carefully, the report went on to say that they were going to close a million tons of very old, very small, inefficient capacity that was environmentally unsound, so that's a net increase of 3.2, and then in the same report, they talked about growth as 2.7, and if all of that were to be true, would you have 500,000 tons over four, five years of new capacity which we don't think upsets the market that much.

The things that one has to look at, though, if all of that is true, if you will put 4 million tons of new capacity in, what will that cost, even if their capital costs are lower, you have to be $15 billion, 16 billion which is a lot of capital for a non-labor intensive business in a country with a lot of people looking for jobs, and we assume again, and then we've also looked at the power situation there, and we understand that they're short power and some of these big projects for the future are, I think, the big hydro project we're talking about is going to come on in 2010, so that wouldn't be, you know, the solution here. So they would have to build quite a bit of capacity which would also be billions of dollars and the last question is aluminum, and then if that comes on, you have issues as to whether there's sufficient supply available. That's just the China situation.

We think clearly they will expand, but we're not certain that it's going to be the huge upset that a lot of people have been predicting it will be, and in fact, I think we recently saw another report on that which showed China coming in with capacity and then toward the end of this decade being a big importer again, and it depends on how much they actually build and how fast their growth and demand turns out to be, and in terms of other people, we're seeing announcements of plants in various places of Iceland, for example, but, again, you read the whole report, you see that they haven't built the hydro station yet, and there is a group of people who, I guess, are in that area of Iceland who object it to environmentally, and when does that plant get built and does it really get built? It's hard to say. Right now, there's a lot of concern over these announcements and usually, not all of that happens and in fact, oftentimes very little happens. At this point, with the combination of all of those kinds of questions in weak aluminum prices, I don't think we're going to necessarily see a substantial amount of new capacity coming on in the next, say, five years. Does that help? Does that answer your question?

Yes, thank you. It helps me understand your thinking and maybe I can figure out where you're going. Thanks.

Okay. I would add to that, where we're going is to try to improve our competitive position, and that is mainly through acquisition of operations that are lower cost in our operations to bring our cash cost down. At this point, we are not adding capacity to the industry. We're simply looking to acquire existing capacity. Longer term, we would look for Brownfield, if it made sense in plants that we own, or for Greenfield, but at this point, I don't think we would be a participant in that. We certainly will keep a close eye on some of these discussions about new capacity and about electron and that would influence our thinking as it develops and evolves.

We'll now go to the line of Scott Manduka with Manchester.

My question has been answered. Thank you.

We have no further questions in queue. Pardon me, we have a follow-up question from the line of Daniel Rolling from Merrill lynch.

Craig, when your emphasis on China, I'm curious. Is China too remote, or is China of interest to you? When you said it was overseas, I didn't think of China immediately.

I think China, for a company our size, and our capital structure and so on, I don't think China's a place where we should be seriously spending time. I think that's for other people.

Thank you.

Again, if there are any further questions, take the opportunity to press the one on your touch-tone phone at this time. And Mr. Davis, we have no further questions. Please proceed.

All right. That closes our formal presentation, and hopefully answers the questions you had. I think we've said this now for the last maybe two or three and maybe four conference calls that we hope to be able to talk to you about next time. We do, indeed hope that, but I would reemphasize while we depart plan on the kind of troubled market situation we have, we did structure the company to go through this kind of period. It is working. We do remain cash flow positive. We should be able to withstand, if it were to happen an even weaker year next year and remain cash flow positive. So while we're not, obviously, happy or thrilled about where the economy is in terms of the impact on the aluminum industry, we are working through it, and we continue to look for future opportunities when the markets are ripe for us and to improve our cost position, so we thank you for your interest and look forward to speaking to you next time.

Ladies and gentlemen, your conference will be available for replay beginning at 5:30 p.m. today, the 23rd of October 2002. Until tomorrow, October 24th, 2002 at 11:59 p.m. To access the AT&T executive playback service during that time, dial 1-800-475-6701. Internationally, you may dial 320.365.3844, and enter the access code 653892. Those numbers are 1-800-475-6701, and area code 320.365.3844. The access code, once again is 653892. That concludes your conference call for today. Thank you for your participation, and for using AT&T's executive teleconference service. You