Century Aluminum Co (CENX) 2003 Q1 法說會逐字稿

Ladies and gentlemen. Thank you for standing by. Welcome to the first quarter 2003 earnings performance conference call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during this conference, please press 0, then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, the director of communications, Mr. Al Posti. Please go ahead, sir.

Good morning, everyone. Welcome to Century Aluminum's earnings conference call covering the first quarter of 2003. 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 involve 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, to continue the conference call, here is Century's president and chief executive officer, Gerry Meyers.

Thanks, Al and welcome everybody to our conference call. Most of our team is with us here in Monterey today, and Jack Gates who is responsible for our operations is participating From Hawesville. Jack and David Beckley will be speaking in a minute but I wanted to take an opportunity to make a few broad remarks about the quarter first.

Obviously, earnings in the quarter were significantly affected by two major events. The first is the charge related to our adoption of FAS 143. The second is a gain related to the termination of the last five years of an above market long-term metal delivery contract. The cash proceeds from this were received on April the first 2003 and were used to help fund the acquisition of the remaining 20% of Hawesville which falls on April the first 2003.

Global economies in the aluminum markets remain difficult and uncertain and beyond the two significant items that I mentioned, Century would still have recorded a loss for the quarter although a smaller one than in quarter 1 of 2002 or quarter four of 2002 for that matter. The progress in operating performances occurred at higher price realizations and continued progress of cost savings efforts more than off offset is the negative impact of higher energy costs which we incurred in the quarter and importantly we continue to be cash flow positive. Now I'll turn it over to David Beckley and then to Jack Gates for their specific comments.

Good afternoon. A little bit more on the credit and the charge. Century reported first quarter 2003 net income of 17.6m or 78 cents a share the after tax credit was $26.9 million or $1 $1.20 a share and is related to the last five years of the

110 million pounds delivery contract, above market to market in years 2003 and 2004,a one-time non-cash charge of $5.9 or 26 cents a share which results of adopting financial accounting standard No. 143 accounting for asset retirement obligations.

The charge is related to accruing an estimate of the cost of removing spent pot liner that would be required when our reduction plants reach the end of their useful lives. Excluding these two items we would have reported a loss of $3.4 million or 19 cents a share. As a point of clarification, although we recognize the benefit of terminating the 110 million-pound per year delivery contract in the first quarter we actually received the cash on April 1 and the cash was recorded in our second quarter. At this point I'll turn it over to Jack Gates who will talk a little bit about operations.

I’ll review the operations of our three smelters for the first quarter. Ravenswood had its best quarter ever in safety and the current level of safety performance compares favorably with the leaders in the industry. Production levels and cost performance continued to improve and met or exceeded all first quarter goals. Ravenswood did experience higher energy costs due to the extreme cold weather but more than made up this increase by their active cost reduction process and the higher production levels. The plant is also receiving excellent cooperation from the steel workers union in working together to improve their overall operations.

Mt. Holly's hot room operating efficiencies continue slightly below expectations as the plant refines its operating parameters at the higher amperage levels due to the reduced efficiencies, metal production was slightly below first quarter expectations, production costs were up slightly due to the reduction in production and the increased costs for electricity caused by South Carolina's very cold weather which forced our supplier, Santee Cooper to purchase high priced offsystem replacement power. These additional costs were then passed onto Mt. Holly based on the fuel adjustment clause in our contract. Natural gas were also slightly affected due to the extreme cold weather.

Hawesville operations were slightly below expectations for the quarter. These stretched expectations were set based on increasing amperage in all five pot lines while maintaining the same operating efficiencies. We achieved the higher amperage but operated slightly below expectations in efficiency. Operating efficiency improved each month during the first quarter and we anticipate achieving the annual production goal by year-end. Hawesville also experienced some higher energy costs due to the cold weather but managed to offset most of these additional costs in reduced spending in other areas.

In summary while production was slightly below the stretched goals we set Mt. Holly and Hawesville, both smelters produced considerably more aluminum than the same period last year. In total all three smelters produced 1.5 million pounds than the first Quarter, 2002. Although energy costs at all three smelters was greater than expected we anticipate this to ease as the second quarter progresses and we're on track to achieve the one cent per pound reduction in cost by year-end as compared to the 2002 average cost. Now I'll turn it back over to Gerry Meyers.

Okay. Thank you, Jack and David. Mary Sue this point I'd like to open it up for any questions that people may have.

Very good, sir. Ladies and gentlemen, if you wish to ask a question, please press the 1 on your touch tone phone. You will hear a tone indicating that you've been placed in queue. You may remove yourself from queue at any time by pressing the pound key. If you are using a speakerphone, please pick up your hand set before pressing the number. And our first question comes from Bruce Klein with Credit Suisse First Boston, please go ahead.

Hi. Good day. Question on just the natural gas sensitivity if you can help us with that and secondly what the surcharge I guess on Mt. Holly, how does that work? Does that stay in place? Does that go away? And under what conditions would that happen?

Mm-hm. Let me talk about the electricity first, Bruce. To the degree that the Santee Cooper system requires higher priced fuel to run their system or to the degree that fuel prices increase, a portion that of gets passed onto us in this fuel adjustment clause that we have in the contract, and we had a -- in the fourth quarter, early in the first quarter they had to purchase a lot of offsystem natural gas power at a time when gas rises were $7, $8 per MMBTU so that is what happened, and we don't have great visibility with Santee cooper and their power prices but we do expect that that situation has -- had eased and has passed by and we would expect to get back to more normal costs in second quarter.

What did it cost you in the quarter?

It cost us probably around a million bucks pretax.

Okay.

I that I that's right, David, right? Yeah. And natural gas, we are -- natural gas runs us about a penny a pound in terms of every pound of production that we make. We're 50% hedged, and I think that that probably gives you the kind of sensitivity to -- that you would require.

And secondly just tell me the status of the [Peshnay] rolling mill at Ravenswood, how they're performing, and how -- what's kind of the read from them with regard to their commitment, et cetera, to that facility.

Well, I think, as I probably mentioned in the previous conference call, I'm really not comfortable speaking for them regarding their plans, but they have stated publicly that and to their employees that with the signing of labor contract extension, I think that was at the end of last year, extends the labor contract I believe a couple of years, that they're committed to operating, completing their restructuring of the plant and operating it for at least a couple of years.

All right. And they do need to give you a 12-month notice; is that right? If they are going to cut back?

That's correct.

And the last question was just general comments about the aluminum market. More particularly, maybe what you're seeing -- what are Your latest thoughts on China and their supply and how much of that new supply do you think is going to hit and what you're hearing over there?

Well, China is the $64,000 question, I guess, along with -- along with the overall global economic situation, and I think in term of the global economic situation, the next two or three months are probably going to be very informative in terms of what we can expect for the next 18 months but right now that's very uncertain.

In terms of China, I think the key to China right now is in the next two years is going to be alumina, and alumina availability and cost, and as you know, Bruce, China is the largest by far importer of spot alumina that is not priced on long-term contracts but bought on a spot basis. Significant portion of their alumina is supplied that way, and alumina prices have gone from in November of last year about $150 per ton to a little over $300 per ton as we speak today. That adds a lot of cost to -- to an operation, and I think that with the capacity that is on the -- the alumina capacity that's on the drawing boards and going to be available in the next couple of years, it is going to be a constraint to aluminum, growth in aluminum production, and the most likely place that that constraint is going to occur is in an area where people are buying it on the spot basis and aren't covered with a long-term contract, so I think there are a lot of informed people who think that China's growth rate is going to slow down until alumina supply increases, at least until then, which is likely in a couple of years. Their rate of growth is unlikely to continue the rate of growth that we saw last year.

Jerry, what's the aluminum spike, what is it due to mostly, China and buying or what else do you contribute it to?

Yes, I think so. I think Chinese production has increased rapidly. Overall, overall global demand for alumina and the lack of new facilities and expansions that have been built in the last two or three years.

Thanks, guys. Appreciate it.

Okay.

Our next question comes from Bruce Levy with Royal Bank of Canada. Please go ahead.

Hey, it's Brett. Let's see. First off, can you talk about kind of hedges for the balance of the year. I think there was some talk around about a 72-cent inflection point. It looks like you are at about 70 in the first quarter. Can you talk about kind of where the hedges sit for the balance of the year?

Yeah, Bruce this is David Beckley. With the addition of the extra 108 million pounds from Hawesville we're about 53% hedged. That includes the alumina component for the balance of the year. And, you know, the portion that's alumina is about 25% of that 53%, and the portion that's priced as we said before is approximately the mid 70s.

All right. And then can you talk about the cash impact of the Hawesville acquisition on second quarter cash and then just generally talk about working capital as well, kind of for the balance of balance of the year?

Well, obviously the Hawesville acquisition will have a positive impact on our cash flow. Going into the year our cash flow break even point was approximately 57 cents, and the addition of that additional capacity will lower it between probably closer to a half cent a pound for the remainder of the year. Working capital will not go up substantially. It's relatively insignificant.

Brett Levy All right. And can you talk to Cap Ex for the balance of the year?

Yes. Cap Ex for the year, as we communicated last time, we expect to be about $20 million. I still think that's a pretty good number. If we just pro rata increase it for the additional Hawesville piece, it would be another one to two million dollars but I think it's going to be closer to $20 million. We rarely spend to our plan entirely.

Brett Levy Alright and then in terms of -- in terms of acquisitions or expansions, you know, are you guys kind of hunkering down for the near term and trying to post some good numbers and get your equity price up or are you kind of actively out there looking for stuff in the '03 context?

Well, we're keeping ourselves aware of opportunities that might be available to us, and we're looking for, you know, the timing on anything like that would have to coincide with financial markets which would be favorable to us which would presumably coincide with better aluminum markets as well.

Brett Levy All right. Thanks, guys.

Okay.

The next question comes Novojka Wacoviac with HSBC Securities. Please go ahead.

Good afternoon, this is Novojka Wacoviac from HSBC. I have two small questions. First, I was wondering whether you can provide some guidance on depreciation for the second quarter and the year.

Let me answer that. Going into the year before the acquisition of the extra 20% of Hawesville, we expected to have approximately 50 million of depreciation and amortization. The extra depreciation associated with the Hawesville acquisition should be approximately $4 million for the remainder of the year, so we should be in the approximate $55 million range for the entire year.

Great. Perfect. My second question, I was wondering when will you be in a position to renegotiate the terms of your power contracts?

Let me deal with that one. We are -- our power contracts at Hawesville basically go through 2010, so there's little renegotiation to be done there. We have small pieces of that power that we price in a year at a time starting, actually starting last year, and we're in constant discussions regarding that. At the Mt. Holly smelter and at the Ravenswood smelter, those power contracts don't expire until the end of 2005, and we're involved particularly at Mt. Holly in extending, in discussions regarding extending that contract and we're looking for opportunities similar to that at Ravenswood.

Okay. Thank you.

Okay.

Our next question comes from Paige Ascher with Goldman sacks. Please go ahead.

It's Sandy Petagene from Goldman Sachs. Good Afternoon. Can you give us a little more your hedging positions for 2004 and 2005 now that you've monetized the forward sale contract.

Yeah. In 2004 we'll be approximately 35% hedged, 25% of that is the alumina contract, and then beyond that we really have no hedges in place other than on alumina. We have not had an opportunity to sell forward with the depressed markets that we've experienced over the last several years.

How long is the alumina contract?

They vary in length. Let's see. Most, about half of our alumina contract expires in 2006, and we have another piece that expires in 2005, probably about 40% that we're working on an extension, and the remaining piece expires in 2008.

Great. Thank you.

Okay.

And as a reminder, ladies and gentlemen, if you do have a question, please press the 1. Our next question comes from Terry Ortland. with TSO & Associates. Please go ahead.

Thanks. Just the balance sheet question with respect to the due from affiliates the $58 million. That will continue for how long before it gets into some sort of a cash or accounts payable?

Okay. The increase there relates to booking the $35 million receivable from Glencore in the first quarter, and that money was received on April 1st so it will go right back down.

Okay. And Jerry, your characterization of the market, difficult and uncertain, how could would you characterize the January, February, March trend and looking into April in States specifically?

We frankly have not seen a lot of improvement in the last eight weeks, the last, say, six to eight weeks, so it's, you know, I'd like to say we're seeing some more positive signs than negative but frankly it's pretty horizontal.

Is it any weaker than back in February and March?

It -- I think the year started out with a respectable January at least in terms of orders, whatnot from semi fabs, and I think has dropped off in February, and it maintains that lower level, top level.

All right. Thanks, guys.

Okay.

Our next question comes from Joe Lemonowitz with Prudential investments. Please go ahead.

Hi. Thanks. Can you comment on pension and post retirement expenses and how much of it is non-cash?

Perhaps you could give me a call offline after this conference call on that. I need to look back at my notes to tell you a little bit about that. In terms of pension, I've indicated in the past that it's a relatively minor. Our pension expense in 2003 is probably going to be a million and a half higher than it was in 2002 which would put it around $6 million and the cash requirements for pension are going to be approximately $4 million or slightly less. In terms of [OPEB] obviously the expense is quite a bit higher than an actual cash occurrence but I do not have that number in front of.

I'm looking on the cash list statement it looks like it was a little over $3 million. Is it fair to annualize that or do you just want me to call you back?

Why don't you give me a ball back.

Okay. The 57-cent break even point. What's the reference?

That's an LME basis.

LME spot.

That's correct.

That's all I have. Thank you.

That covers Cap Ex as well as all operations and interest and so forth.

Right. Okay. Thank you.

Okay.

And as a reminder, ladies and gentlemen, if you do have a question, please press the 1. Our next question comes from Robbie Comet with West LB. Please go ahead.

This is Robbie Comet, West LB. A couple of questions. One, if you could give some guidance for what you're looking for shipments, for the second quarter and the rest of the year, and then secondly on the alumina contract that you have, is it your expectation that when the ones that do come up for renewal, I guess in '05 or '06, do you at this time expect the ratio or the, whatever the percentage of the aluminum to increase? I thought I read somewhere that there is some talk about that, if you could comment on that. Thank you.

In terms of the LME alumina issue, I'd really rather not comment on that right now. We're in the process of negotiating that particular contract extension, and I really wouldn't care to elaborate any further at this point. In terms of shipments, we did build -- we are producing slightly more, as Jack Gates said, than we have in the prior year. I think was like about a million and a half pounds a quarter rate. And that should translate more or less into shipments. We shipped a little bit less in the first quarter of this year than we did in last year's first quarter because of some shipments of purchased metal actually that we made in last year's first quarter, and an inventory build, slight inventory build in the first quarter of this year. I would expect to see some of that reverse in the second quarter and so you should see some increase, and then a little bit further increase as the year progresses.

So something like 288 or 290 million pounds for the quarter? Does that seem ...

I think that is way too high. Oh, no. Yeah, yeah, right. With the new piece in. Right. You're right.

Okay. Great. Thank you.

And our next question comes from Marty Pollock with NWQ asset management. Please go ahead.

Yes, just a couple questions. I apologize. I was actually offline for about a minute, and I suddenly went into the Q&A. Just confirm if you would, the free cash number, as you define free cash, I heard the number 29. Was that the number for the year? After Cap Ex. Sorry. What?

What we said, Marty, is that our cash flow break even point on an LME basis is between 56 and 57 cents a pound and that covers our Cap Ex. Our cap ex for the year is expected to be 20 to $22 million.

Okay. With regard to cash generation, though, you know, I'm not talking about the break even but based on what has been the depreciation run rate and also assuming where we, you know, where I think you were generating about 15 or $20 million was it last year on a net basis so that on a cash basis you were seeing some cash coming in, I just want to clarify that, if you would.

Marty, I would suggest perhaps you call me offline. You know, obviously during the quarter looking at our financials, we generated approximately $12 million cash during the quarter, and in terms of if you would like to have a dialogue on perhaps how we do some cash flow monitoring, we can talk about that offline.

Okay. Secondly, with regard to the aluminum price, alumina price itself, your price, essentially, your price fluctuates with the market. I mean, you have the contracts, but has the trend been more negative in terms of capturing, you know, because aluminum prices have been stronger? What are you seeing actually at the moment? Vis-a-vis the --

All of our alumina is covered under long-term contracts. None of its purchased on the spot basis. All of it is referenced to the, indexed to the LME so it's X% say, for example, this isn't is the right number but say it’s 13% of the LME. If the LME goes up $100 a ton in terms of aluminum prices, we get about a 25% change in -- we get 25% of that changes our cost.

So there is no ratio change at this point, and essentially you fluctuate both up and down.

That is correct.

With regard to the first quarter, just the energy impact, what was that, if you would, in terms of nominal dollars?

It would have been compared, compared to the average of 2002, our average cost, it would have increased our cost by about $2 million pre-tax in the first quarter over last year's average, and that is spread between gas and the electricity at Mt. Holly.

I apologize again. The last question was with regard to the actual average price. I think that you quote usually the Midwest. What was your -- what was your price for this first quarter?

Our average price realization, I heard David say that was 70 cents for the quarter.

Okay. Thank you.

There are no additional questions at this time. Please continue.

Okay. Thank you Mary Sue and thank you all for participating. I think in summarizing the economic environment remains difficult, but we continue to emphasize and make progress on positioning the company to maintain positive cash flow in difficult times, and I think importantly, we're doing this by doing the things that will allow us to capitalize on the better price than environments when they do occur. Again, thank you everybody for participating. Look forward to talking to you next quarter.

Ladies and gentlemen this conference will be available for replay after 5:30 p.m. today through Friday, May 2nd at 12 midnight you may access the AT&T teleconference replay system at any time by dialing 1-800 800-475-6701 and entering the access code 679321. International participants may dial 320-365-3844. And those numbers again are 1-800-475-6701 and 320-365-3844 with the access code 679321. And that does conclude our conference for today. Thank you for your participation and for using AT&T executive teleconference. You may now disconnect.