Century Aluminum Co (CENX) 2003 Q2 法說會逐字稿

Welcome to the second quarter 2003 earnings performance conference. (CALLER INSTRUCTIONS) As a reminder, today's conference is being recorded. I would like to turn the conference over to Al Posti.

Welcome to Century's conference call covering financial results for the second quarter of 2003.

Let me add 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 involve significant risks and uncertainties. Actual results may vary materially from those express or implied in the forward-looking statements as a result of various factors.

Now to continue the conference call is Century's President and Chief Executive Officer, Gerry Meyers.

Thank you, Al, and hello, everybody. Thank you for joining our conference call. Most of our team is with us here in Monterey today, except for Jack Gates, who will participate in the call from Hawesville. David Beckley and the Jack will comment more specifically on the quarter in a moment, but first I wanted to make a few broad remarks.

Markets have remained difficult. Key economies in North America and Europe have continued to struggle, while there have been some bright spots in Asia. This really hasn't changed a lot from quarter one or even from quarter two of last year. Although we've had a bit of an aluminum price run (technical difficulty) prices have remained in the trading range that we have experienced over the past two years. In (technical difficulty). Nevertheless, Century has continued to make real progress in its results. David Beckley will speak more specifically about the quarter-to-quarter comparisons, which are somewhat complex because of the accounting changes and the gains associated with the 110 million pound metal delivery contract.

The progress in the quarter came principally from two areas -- continued improvement in the cost and operating performance of our plants; and secondly, from the benefits of the extra 20 percent of Hawesville, which we purchased at the beginning of quarter two. Also importantly, in 2003 we have continued to generate cash flow from our ongoing operations.

I will turn it over to David Beckley.

Century Aluminum Company reported a loss of 5 million after-tax, or 26 cents a common share, for the second quarter of 2003. As indicated in the release, our loss would have been reduced by 2.2 million after-tax, or 10 cents a share, had we accounted for the above market 110 million pound annual delivery contract that remains in place in 2003 on the same basis as last year.

When we made a decision to convert a portion of the ten-year 110 million annual delivery contract to cash in the first quarter of 2003, we no longer could assert under the accounting rules that delivery was probable. Accordingly, we lost the ability to treat this contract as a sales contract and now have to treat it as a financial instrument requiring marked-to-market accounting. To comply with the accounting requirements, we marked-to-market the entire contract for 2003 and 2004 in the first quarter of 2003, essentially recording all of the income statement benefits in that quarter based on market prices in effect in the first quarter of 2003.

I wish to emphasize that the cash flows of the Company for 2003 and 2004 are still based on the original contract terms.

After adjusting for the accounting change and the marked-to-market adjustments, as Gerry indicated, our results in the second quarter of 2003 were better than the first quarter of 2003 and the second quarter last year for two principal reasons -- first, we continue to make progress in our cost reduction efforts in improving our operations; second, our results include the acquisition of the 20 percent interest of the Hawesville facility on April 1st.

Finally, there are a couple of items on the balance sheet that I would like to comment on that vary significantly from year-end. Prepaid and other current assets went from a balance of 4.8 million at year-end to 15.6 million at June 30th. This principally reflects the asset associated with the marked-to-market adjustment for the (indiscernible) delivery contract that I just talked about for years 2003 and 2004. Other liabilities long-term went from 8.4 million at year-end to 34 million at June 30th. There is two items in the year that principally account for the increase. The first is in the first quarter, we, based on the new accounting standard, had to book the estimated cost of disposing of our (indiscernible) that accounts for $16 million of the increase. Finally, in the first quarter, when we converted the metal delivery contract to cash for 2005 through 2009 one of the accounting adjustments we made was to record a derivative (ph) liability of $9 million.

At this point I will turn it over to Jack Gates, who will talk about our operations.

Jack, are you there? Looks like we have some problem with Jack in terms of calling in from Hawesville. I will just make a few comments regarding our operations.

Basically all three smelters operated very well in the second quarter. Performance and safety was excellent, metal production was at or above expectations, as was cost. We expect -- basically where we thought we would be, in terms of all of these aspects of our operations at this point in 2003, is consistent with meeting our cost reduction objectives, which, as I think you all probably recall, are to improve our costs by the end of this year on average about one penny per pound over 2002's actual costs. I think second quarter of 2002 -- 2003 actually was about 7/10ths of a penny better than the same period last year in terms of our costs, excluding the LME (ph) impact on aluminum supply.

At this point, I'd like to open it up for questions now.

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Bruce Klein (ph), CSFB.

I just was wondering on the electricity side what you're seeing and anything out of Ravenswood in terms of surcharges. Secondly, just (indiscernible) to get together, any thoughts on what could happen to the rolling mill in Ravenswood or any additional conversations or anything like that? Thirdly, what you're seeing in the market in China in terms of their expansion.

In terms of electricity at Ravenswood, basically we have had, and continue to have, in our contract extension with AEP (ph) -- which expires in 2005 --- what is essentially very much a fixed-price contract, so there really hasn't been any adjustments like that. You may have been referring to Mt. Holly, where we have the fuel clause adjustment (ph) (multiple speakers) -- okay, and Mt. Holly in quarter two, power costs returned to more normal -- expected -- the levels that we expect basically from quarter one as that high gas price and problems that they had earlier in the year kind of dissipated.

In terms of Pechiney and Alcan (ph), there has been no discussion whatsoever with us, or by Pechiney with us, concerning the rolling mill in that context. What we assumed it is that -- in fact what the facts are is that we have a metal supply contract for most of the output of Ravenswood to the rolling mill in molten form. We now have a cash test (ph) that is capable of casting it so we can certainly sell that to another source if required. However, I should emphasize that we do have a contract in place and the kind of merger or acquisition that's contemplated would certainly take the responsibility for that delivery contract and it would go to the new owner.

I think lastly, you asked about China. China, from what we understand year-to-date, the production and demand in China are both up by very large numbers -- in the 25 percent range. In fact, what we see when we look at net exports from China -- the statistics that I see show that exports are still basically in the same range as what we were experiencing last year at this time, which would sort of verify that demand has been keeping pace with their production.

Having said that, there are anecdotal stories about regional power supply issues in China, and probably more importantly the situation with alumina, which continues to be very tight. China is the -- imports a significant quantity of their alumina requirements. A big piece of that is purchased on a spot basis, as opposed to on a long-term basis. So it's subject to very volatile pricing, which continues to be quite high -- I think probably in the $280 per ton range, which is close to twice what it was last November. At some point, somewhere, capacity expansion is going to have to be constrained if you believe the people who -- I think a lot of smart people are writing about statistics for expected alumina supply expansion. Over the next few years it should constrain -- one would expect, they say, it should constrain past the expansion. So basically in China so far, pretty much the same as last year in terms of its impact on the global market.

Michael Morrisroe, Bear Stearns.

I had a question, if you could give us an update, on where the book breakeven would be now on an LME cash basis and also the cash breakeven, given the transaction with Hawesville.

Again, as we said going into the year 2003, our cash breakeven point is, on the LME basis, is 56, 57 cents a pound for 2003. In 2004, because we're less hedged, it will be closer to 60 cents. On a P&L basis, if you want to adjust your models obviously we will not be running through the P&L the benefits of the 110 million pound contract. So on a P&L basis you would have to adjust your numbers downward on a reported basis. Cash flow breakeven does not change.

On the industry, if we could just touch on -- we've seen a rather dramatic rise in inventories lately, and there seems to be a speculation of how much is remaining off warrant (ph ). Can you guys give what you're hearing out there in terms of further inventories coming onto the exchanges?

I really don't think we can add a whole lot to that discussion. It is our understanding I think a lot of people would share that -- the market has been discounting the fact that there has been significant inventories tied up in financing deals off warrant and as the financing deals expire with the current backwardation (ph) situation, that the only place where (indiscernible) is back on to the LME. It does not seem to have been having an impact on prices, as evidenced by what we've been seeing over the past week to 10 days; prices have had a little run up above what the upper end of the trading range that we've been experiencing for the last couple of years. So it seems that the market has been expecting this.

Daniel Roling, Merrill Lynch.

Can you tell us if you've seen any indications of economic pickup? The GDP numbers came out today and they were much better than expected. Is there any indication that you're seeing that's better than what you would have said last quarter?

Yes. I think if you would have asked me even maybe three weeks ago, I would have said status quo. Right now, recently we started to see a few more positive signs than sort of negative signs. We're hearing -- we're hearing and experiencing a little bit of better news in a number of areas and it's really so early in that stage that it's pretty hard to say whether this is real or whether this is just a period we're going through. I think another couple of months like this and we will have something to really be positive about.

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Timothy Hayes, BB&T Capital Market.

A question on the realizations from Q1 to Q2. If I'm looking at it right they declined by two cents a pound.

As I indicated in my remarks, one of the reasons for the decline is we no longer take revenue credit for the 110 million pound delivery contract and that translates to approximately about a penny a pound. Also, I would comment that the Midwest premium in the second quarter was I think about a penny weaker than it was in the first quarter. So those were several factors that impacted realizations.

Just looking at the Midwest price from Q1 Q2, that was also down about two cents and at first glance you would think that that would be consistent, but in terms of some hedging that's being done in fixed contracts -- or fixed-price contracts, I would have figured that the realizations would have declined by at least somewhat less than two cents. Is that -- would then be a fair way of thinking about it? And if so, what may have happened there?

Again, the Midwest was down approximately a penny quarter-to-quarter and the fact that we couldn't taken -- we did record in our revenues the benefit of the 110 million pound contract -- annual delivery contract, that really basically accounts for the two-cent deterioration of average price realizations.

I think from a cash-flow basis that David was talking about earlier, if you kind of look at the marked-to-market pro forma, the actual change in realizations was a little less than a penny from Q1 to Q2.

The percent being hedged right now -- the number that you normally quote -- what is that?

For 2004 it is up slightly. It's about 41 percent. We've done a little bit of forward selling based on the forward market, but very modest.

And the balance of '03?

Balance of '03, there's -- I think there is approximately a little less than 20 percent that's not priced.

Marty Pollack (ph), NWQ Investment Management (ph).

If you would -- I would appreciate just regarding your comments on breakeven in '04 rising to 60 cents, if you would just relative to what would be a low cost for the additional buying of the minority interests, can you just describe which part goes down and what part goes up in terms of the breakeven (multiple speakers)

The principal reason for the breakeven change is we obviously have less hedged in '04 than we had going into ' 03, and essentially the only hedge we had in place for '04 on a cash-flow basis is the 110 million pound contract that remains in place, plus we've done a little bit of forward selling here. On the other hand, offsetting that a little bit is the extra 20 percent of Hawesville. But that's relatively minor in terms on a cents per pound basis. Perhaps it's 59, 60 cent range in terms of cash flow breakeven for '04 (inaudible) those factors.

The other question, if I may, just to again clarify the impact -- the 10-cent impact as you described it, that impact is in effect adjusting for what would be the fair way to look at the numbers, assuming this transaction did not take place. When we're looking forward what are the financial ramifications? You booked a gain with regard to the '04 -- the ramifications for cash flow, just to get a clarify that?

The cash flow will not differ, as I indicated in my remarks. The contract for '03 and '04 remains exactly the same as it was before. On a P&L basis, the only adjustments that you would see is if the market changes -- the forward market for the remainder of '03 and '04, if that changes we obviously are going to continue to mark the undelivered portion of that contract to market each quarter until we get to the end of '04. So the P&L impact from that contract, if there's changes, which I don't know how significant they will be -- probably won't be significant unless the market changes dramatically -- will flow through net gain on forward contracts. Cash flows are unchanged.

Essentially the key issue is the volume that's actually being surrendered on a quarter-to-quarter basis as -- you sold this forward but you're delivering it over the next couple of years?

We're delivering it over '03 and '04 based on the original terms. The issue is the P&L impacts of that were already accounted for (multiple speakers) first quarter of '03 and the cash will have the same pattern. In other words, if I was doing modeling on an EBITDA basis I would make an adjustment to our reported -- to our EBITDA as you would calculate it by adding back the cash impacts of this contract to EBITDA.

I understand. Just a general question, in terms of what you would think -- assuming things don't change -- if the free cash-flow generation, can you give me some visibility to that, and some flexibility perhaps to the lower debt? Without much change in the dynamics, how -- adjusting for whatever it is with the working capital changes, is there some ability here to pay off -- to pay downs some of that debt?

First of all, we don't work look out in the future and project what our cash flows will be any more than we do our earnings. But 325 million senior notes that we have outstanding have severe penalties if we pay them off. It's four-year non-call. We would essentially have to pay a penalty of $38 million in addition to accrued interest if we were to pay off before four years.

In terms of Glencore note, that is potentially amortizing and there's -- based on metal prices, and we can pay that off and intention would be to do that based on market conditions.

Alex Lassiter (ph), Merrill Lynch.

Maybe looking ahead on the potential for cost savings of some of the operations, could you update us -- I know you've been -- you targeted the one cent and it looks like you're about there. I know you made some incremental investments here and there. I think there was an overhead crane and some iode (ph) cleaning devices. Going forward do you expect to continue at the same kind of rate? Can you get that? Would it increase or would it perhaps tailoff, the potential for cost savings?

I think we will continue with cost savings. Every year you have a certain amount of inflation and inflating costs, and you first of all have to offset those and then you have to make further improvements to make further gains. We will have a program -- I believe we'll have a program coming for the coming year, which will produce further, cost savings. But you're right -- the longer you go in that endeavor, you're going to start to have somewhat diminishing improvements.

Maybe I guess an idea for what your -- (indiscernible) capital spend budget (indiscernible) for '04?

It probably will be similar to what we're looking at for '03, which as you recall is somewhere around 20 million.

Same as for this year. Yes. So much of the cost savings, if there were any spending related to cost savings, would be pretty much on the margin around that number?

I'm not sure I understand what you're saying.

The 20 million is pretty much just sustaining capital costs --

There will be some projects in there that are designed to improve efficiencies for sure, but obviously that doesn't include the next expansion or anything like that, clearly.

What would you estimate your sustaining capital number would be right now, if that was all there were that you were spending money on? How much more below the 20 would it be?

I would say somewhere -- maybe two-thirds of the 20.

We have no further questions at this time.

Again, thanks, everybody, for joining us. Just summarizing what we've talked about, the economic environment has remained difficult. Century has continued to take actions and make progress in positioning our company to maintain positive cash flow in sluggish economies by doing the very things that will allow us to perform better when the markets -- better markets do materialize. Again, thanks for joining us. Talk to you again next quarter.

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