Century Aluminum Co (CENX) 2003 Q3 法說會逐字稿

Thank you for standing by and welcome to the third quarter 2003 earnings conference call. At this time all phone participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Instructions will be given that time. If you should require assistance during the conference, just press star then zero. As a reminder, today’s conference is being recorded. I'd like to turn the conference over to Al Posti, Director of Communications for Century Aluminum. Please go ahead.

Good morning. Welcome to our earnings conference call covering the third 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 here is Century's Chairman and CEO, Craig Davis.

Thank you Al. Welcome again to all of you to our third quarter 2003 conference call. All of us are in Monterey today except for Jack Gates, who will join us from Hawesville, Kentucky. Before I get into some of the business details there is one subject I'd like to cover. As you are all aware, we have had some changes in our senior management. We are confident that Century has a strong team, and that our team is focused on improving our cost position, and in creating a broader and more competitive base for the company. We are well positioned to capitalize on improving market conditions, and Jack Gates has become our COO. He has excellent experience in the areas of our business focus. Before closing my comments on this subject, I would like to thank Gerry Meyers for his many contributions to the company over the years.

Now I'd like to move on to our business focus for the last quarter. In terms of the third quarter results, the basic earnings performance on an apples to apples basis has improved third quarter of this year over second quarter of this year, and third quarter of this year over third quarter of last year. One of my concerns or perhaps frustrations is that it is very difficult to compare our reported earnings from period to period due to the required accounting treatment of the transactions we completed earlier this year. David Beckley will cover this in more detail in his presentation. What is important is that our underlying performance has continued to improve, and we have remained strongly cash flow positive during this period. I would now like to ask Jack Gates to cover the operations.

Thank you, Craig. Operations at all three smelters continue at or better than most of the goals set for them. Production through the third quarter is approximately 1 million pounds above the stretch goals that were set for 2003. Business has picked up and is 2-3% over last month. Demand for physical units is up and our customers tell us they are not stocking and the metal is flowing through their plants. Ravenswood continues to operate well and is on track to have a record year in several key performance areas. Safety results continue at an all time record level and the plant is on track to make its cost improvement goal. The new cast house is now operational and is selling the metal not required by the sheet mill next door. Hawesville is on track to break the production records set only last year. We continue to increase amperage wherever possible and pot efficiencies have continued a very positive trend. The plant safety record started the year slowly, but currently is showing dramatic improvements. Cost performance is on track to meet the aggressive goals set for 2003. However the necessary purchase of some spot alumina in September to cover a shortage had a negative effect on September’s costs. Mt. Holly’s operations continue to improve as the plant adjusts to the higher amperage. Pot operational efficiencies are back to the pre-increase level, but excessive pot failures continue to affect production and operating cost. Safety performance continues at a world class level. David, I'll turn it over to you now.

Thank you Jack. I'm going to cover the results of operations. Century reported a loss of $5.4 million or 28 cents a share for the third quarter of 2003. If we exclude the three items highlighted in the second paragraph of the release, our loss would have been 12 cents a share. And we'll comment briefly on the three items. The first item is the 110 million pound contract that we began to mark-to-market in the first quarter of 2003. Had we accounted for this contract on the same basis as last year, our loss would have been reduced by 15 cents a share after tax. We no longer report the above market gross profit on the contract that remains in place for 2003 and 2004. The negative pretax effect on gross profit was $1.8 million in the third quarter, that's the pretax impact on gross margin. Secondly, we recorded a pretax non-cash charge of $3 million to loss on forward contracts representing the mark-to-market adjustment on this contract and its replacement contract in the third quarter.

With rising aluminum prices we ended up debooking a portion of the unrealized gain that we recorded in the first quarter. The total effect in the first quarter was $4.8 million pretax or $3.1 million after tax, which translates to 15 cents a share. The quarter also includes a charge of $1 million after tax or 5 cents a share for the added cost of alumina purchased at the spot market due to an unplanned production curtailment at our supplier facility, and a credit of $800,000 after tax, or four cents a share for lower cost to market inventory adjustments. As indicated by Craig and Jack, we continued to make progress on our cost reduction efforts and we generated $26 million of positive cash flow before interest in the quarter. That concludes my remarks and I'll turn it back to Craig Davis.

Thank you, Jack and David. Kim, we'll now open up for any questions.

If you wish to ask a question, please press star then 1 on your phone. At this time you'll hear a tone indicating 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 remember to pick up the hand set before pressing the buttons. If you have a question press star then 1. Our first call comes from Bruce Klein with CSFB. Please go ahead.

Hi guys.

Hello Bruce.

Couple of questions, just with regard to the Ravenswood rolling mill and the status of Pechiney, potentially having to unload it, wanted to get the status there and then secondly, hedges, if there's been any more activity in the quarter at higher prices and what might be a strategy. And thirdly, just the, on the growth strategy of course your stock has obviously done well this year. What kind of things I guess maybe you could just help us when you do look at things whether you can help us geographically where you might look as well as just primary or would you consider alumina as well?

Bruce, you're consistent. You always ask a whole bunch of questions. My memory only go to one at a time.

Ravenswood was the first.

Ravenswood was the first one and in terms of what's happening there, you really have to talk to Alcan and Pechiney. We don't have any involvement in that side what's going on. We continue to supply metal. We have a contract, as you’re aware, which I think we've reviewed for everybody a number of times. As far as we're concerned we're going to continue to perform that contract. No one has given us any notice that they intend to reduce the amount that we're supplying. You're also aware that if for some reason the plant were to change or it not continue to operate, we have now put in a cast house, in our own facility at Ravenswood and we are capable of casting 100% of the material we produce. So in that event we could cast and sell the metal into the open market.

Craig, if they sold to someone else, economically how does it work with regard to that other customer? The advantage is you guys being adjacent still significant in your view?

I don’t think -- anybody who runs that rolling mill can do better than we can do for them next door with molten metal. So it's an advantageous contract to both parties. If someone is running the rolling mill they're going to need molten metal, or they’re better off with molten metal. We assume we'll continue to supply as long as it runs.

I think hedges were the second.

Hedges, we've added a little bit of hedging for 2004 in the last quarter. We are -- I don't have it, what was the number, David?

With our alumina contracts being a percentage of the LME, as you know that represents about 25% of our production, for 2004 at this point we're about 45% hedged.

Okay. I think it was -- was it 41%? I have to check my notes at the end of the --

We did a little bit more selling this quarter so we're up to about 45% at this point.

Okay.

It was somewhat less than that I think during the last report and we have not done anything for 2005. And at this point, the market seems to be back and forth a bit. And our objective in hedging today is to generate sales at a book profit.

What does that mean book profit? Income or --

It means better than cash cost. I'm not trying to be facetious, but we have been reviewing the situation, and the market, and right now, we will continue to have a practice as we have in the past of covering ourselves and covering our cost and frankly, when we did large hedges, we looked at one case of Ravenswood and protecting that as our highest cost plant, our objective is still to look at opportunities like that. But our preference would be to try to improve on just a cash protection hedge. But one that also would create -- at least be a breakeven or profitable on a book basis. And because of all the non-cash items we have, obviously it takes a higher number to get to a book breakeven.

And acquisitions I think was the last one.

Well, as -- again we have said in the past, we have had as an objective, the acquisition or acquisitions of assets that would do two or three things for us. One, improve our cash operating or cash cost position in our overall in the smelter business. Two, to give us some geographic diversification. And three, we have -- we started probably, oh, I don't know, year and a half ago thinking about going upstream into the bauxite alumina side and that is also one of our focuses. At this time, the markets would appear to be coming our way a little bit more in terms of the ability to do things, so we continue to look, and probably if anything are a bit more active in terms of trying to analyze opportunities that might be there. I think it's important, though, in that regard to note that we have said that we would not add more leverage on the company, which is our intent. Which means our main currency would be equity. I know there's been some question about that. I think the principal objective we would have is to look at an acquisition that would achieve the objectives I've just stated, and be accretive.

And with regard to the upstream comment, what sort of change or why the -- what changed in terms of you know, you guys looking at that now?

I don't think it's a change. I think as long as -- I hate to say how long ago it was, because then it appears that we haven't been successful, which may be the case. I think it was a year and a half ago, I may have stated we're considering going upstream, and that our principal focus has been to acquire more in the primary area, which we have done. And to improve our cash position there, and then to start to have more of a focus of going upstream. As we get larger in the primary side, I think it becomes more prudent to look at upstream businesses. So it's not a new thing. It's something that's been evolving and we think there may be opportunities in that area over the next period of time.

And where is -- I know it's not a huge spot market but where is alumina in the spot market now?

Alumina?

Yeah.

The last number I heard was about $300 and perhaps climbing.

Okay. Thanks guys.

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

Hi guys. Can you guys talk a little bit about what the actual realized price for the quarter and sort of how much of that was a function of the hedges you have in place? So with the hedges not in place, approximately what portion of EBITDA came from the hedges?

David, do you want to cover that?

Yeah. The contract that we're talking about, the 110 million pound contract as I indicated in my remarks, the mark-to-market impact in terms of EBITDA was $3 million, and the gross margin that we did not report because we changed our accounting was $1.8 million. So the pretax impact on EBITDA was $4.8 million related to that contract. Negative.

It actually I think what you're saying, two kinds of numbers for me here but I think what you're saying is actually it reduced our average selling price, the way the accounting treatment comes out today.

Yeah, our price realizations would have been at least a penny higher had we accounted for that contract on the same basis.

I believe it's correct to say that prior to this change, which is a required change in our accounting treatment, it would have actually raised our average selling price or realized price.

Now, are you guys seeing out in the market if you include the local premiums, something close to 72 cents now?

I think that's a bit optimistic. The market's definitely improved. It has very quickly gone into as you go very far forward into a backwardation. But I think the Midwest premium strengthened a bit again, three and a half to four cents, am I right about that? 3.9? So you're getting up, well you’re over 70, and depending on the day you're talking about, it could be maybe 71 and a bit.

And looking to the fourth quarter, you would anticipate if prices stay where they are today now, that you would have a similar function going on in the fourth quarter?

You're going to have all of the same issues that David has described in the fourth quarter because we'll end up as he puts it debooking some of the profit on that 110 million pound contract that we had to take in the first quarter. So it in essence will create a negative to us as the price goes up. But that's a non-cash obviously item. It's a reported item only, in that sense.

All right. And then again, just checking in my numbers here, you were about 25% hedged in '05?

Well, that's alumina.

That's alumina, right.

Brett, as I indicated, if you take the alumina and our forward sales, including the 110 million pound contract that still remains in place, we're about 45% hedged for 2005 -- 2004. I'm sorry, 2005 we have no forward sales whatsoever, we have only the alumina hedge, 25%.

25 was the number I was actually taking through.

Exactly.

Can you guys talk about the alumina market a little bit? Obviously, most of the market is still on contract but some of those contracts are rolling over. Right now I think there's only one major project in Australia. As you guys kind of look out there, it sounds like you are sort of hunting around for acquisitions in that neighborhood as well. Are there sources of alumina, are there projects that could potentially come on further out that are on the drawing board? Let’s talk about the business outlook for the next, I don't know, bunch of years.

Bunch of years. I think clearly, the alumina market is tight today. Alumina goes through these cycles just as aluminum does. And sometimes in different parts of the cycle. You have had spikes, as you probably know if you follow the industry for very long of alumina up to a few years back, $600 a ton, but it didn't last very long. These spikes tend to be relatively short-lived. There hasn't been a lot of new capacity in the alumina area in recent years, so there's probably some pressure on alumina. A lot of this is driven by what's going on in China as I think has been discussed over the last few calls, and is reported on rather regularly now. And that will have some impact in terms of the ability, probably, of China to expand or continue to expand at the rate they have in the past. And that maybe becomes almost a balancing factor out there. There are projects, out in the future, on alumina, and there are expansions that are available. You will probably see some of this starting to be discussed as -- especially if the perception is that alumina is going to be inherently a big tight for the next few years. I think there are projects that have been discussed for some years in India for example, and there are expansion potentials still in Australia, probably in Jamaica, and in South America. So there’s lots of opportunity for us. It’s a question of when the major players that are in that end of the business, the bauxite mining and alumina refining area, decide that they have good opportunities, I think, and that’s an area where, on a green field basis, probably we would not be a party participating at this stage of our development.

And the time line to get a green field ramped up is still almost three years?

Jeez, it's been a long time since -- Jack, do you have a better feel for it? If you take the mining side as well, it’s probably longer. What is your view?

It would take longer than that. Three years would be minimum. You’d be looking at closer to four, four and a half years, for permitting and engineering, construction, the whole bit. I would think three years would be a little short.

You couldn't develop a mine and a refinery in that time, could you?

No, you could not.

Things look pretty tight there for a while?

It really yes, I think. But that tightness again depends a bit on what happens in China. [multiple speakers] Yeah, okay. Yes, Kim, any other questions?

Yes, we do have a question from Michael Gambardella from J.P. Morgan.

Good afternoon.

Good afternoon.

I have two questions. First, why did Gerry retire so quickly after becoming CEO?

Those are personal reasons to Gerry.

Okay. And second, could you give us some more details on your cost cutting efforts going forward?

Jack, can you address that?

Yeah. We're looking at, of course, the manning issue. We continue to make adjustments in our manning in all of our plants. We're improving our pot life, so therefore we are having fewer pots to reline and dispose of spent potliner. At Hawkesville, we’re continuing to push amperage, so metal production continues to increase, and we're looking at a significant increase again in 2004 and 2005, which affects metal costs. So it's a combination of a lot of things, Craig. Everywhere we spend money, we are looking at reduction in use of raw materials, manning, additional production, just all of the above.

Do you have a target for '04?

Well, we're putting those plans together right now. They're not completed so -- I have a target myself. But it's not completed yet. I'd hate to say right now.

Okay.

It's a target he hasn't committed yet to us so he probably won't tell you.

All right, thank you very much.

All right.

We have a question from Alex Latzer of Merrill Lynch.

One of my questions was answered on the cost side. I was wondering how much -- Ravenswood the capacity is 170 million pounds. If you had to you, like you said, could cast all of that yourselves.

Right.

Or, if you wanted to, could the adjacent rolling mill take all of that as well?

Well, first of all, it is 170,000 tons, so it's 300 – actually pushing 370 million pounds I believe. And could they -- well, ultimately, they cast almost all of it in the past. At the rolling mill, when we owned both facilities, we took molten over there and we put it all in a cast form. So I suppose the answer is, they could. We -- I personally am not up to date on all of the changes they've made in the cast house. I know they've done a fair amount there. But at this point we see it as if something were to change, we would cast all of it ourselves. I think in fact, we're actually doing a little bit of casting for them right now, aren't we Jack?

Correct. We are casting the [indiscernible] for them right now. They are taking about two-thirds of our production molten and we are casting our own [indiscernible] and actually casting for them.

I wanted to get an idea of that. And then I guess regarding alumina, the supply disruption I guess hasn't dampened your appetite for moving upstream at all, in fact maybe it sort of perhaps made it more desirable, so you can hedge yourself a little bit more.

I would think it really is almost a neutral. We have solid contracts. We just think that long term, where we've decided to focus in the industry, the upstream side of it, which is part of the basic commodity, is a good place to be. It has been over the years a very strong business for Alcoa and some of the others. We think there will be good opportunities in the future and part of it is to yes, supply yourself, but you have to supply yourself at what you think you could sell it for in the market, because otherwise you're kidding yourself a bit. So we see it as a good business as opposed to just saying we're going to cover ourselves.

I see. Okay. Thanks. Good luck with that going forward.

All right.

We have a question from John Hudson with [Reichler] Capital. Please go ahead.

Hi, good afternoon. For Jack, Jack you mentioned that you’re having excessive pot failures at Mt. Holly, is that related to the higher amperage or what’s going on there, and kind of what was the impact from a cost standpoint?

Yes, it’s related to the higher amperage. We went from 215,000, [225,000 -- 10,000] amps, and when you do that, those pots that are getting close to the end of its life, sometimes you push them over the edge, they've had some excessive pot failures. They're probably – they’ll reline 20 to 25 pots more than they had anticipated for the year. It seems to be leveling out now, but they did have quite a few excess failures. It is strictly in tune with the amperage.

What kind of cost impact has that had?

Well, a pot at Mt. Holly is in excess of $100,000, so if you line 20, 25 more, it’s pretty good bucks, but it’s also -- you lose the production. You have the cost of lining a pot, disposing a spent pot liner, and you lose the production, so it's kind of a combination of all three.

And you're not having that problem at Hawesville, where you're raising the amperage there too?

We raised the amperage at Hawesville a little slower. We had a few extra pots failed at Hawesville but nothing anywhere close to where they had it at Mt. Holly.

Craig, on the acquisition front, your comments on upstream and alumina --two questions. One, obviously there is a number of alumina properties that may shortly get auctioned off here. Should we anticipate that you guys would be a bidder in one or more of those and then second part of that is, would you go longer kind of go long alumina if the opportunities arose, you know not just be in balance for your own supply but as you said be a merchant?

I mean two things. One, we are looking at all opportunities that present themselves to us and we think are out there. I'm not a great fan of the auction process, but it's there, and if that's -- if that's what -- we think opportunities are there and that's what presents itself to us, we'll have to look at it. On the question of going long or not, again, we see it as a business. And therefore, it's not a question of being in balance, since we do have contracts, if we were to add alumina capacity today we would be long. We would then be in the market selling alumina.

Unless you bought your current supplier?

Well, yes. That's -- that's true. But if you -- if we bought any of our current suppliers, they have more than we need, so we'd probably still be long.

Right, okay, great, thank you.

You're welcome.

Our next question is from Joe Lemanowicz of Prudential.

Early on you made a comment about pickup and demand. Could you just comment on the end markets and what you hear and see there?

Jack, I think, made some, I'll add a little bit and if Jack wants to jump in after that, he can. What we’ve seen a little bit of and I've done a little bit of chatting around just to get as recent input as I could. Apparently, a little bit of general tightness but some of it coming in transportation occurring here, lead times changing a bit, reasonable demand and in the United States, and at the same time, maybe a little bit of a pickup starting to occur – specifically, the reference I got today was in Germany. So that a bit general in a way, but also, there was some discussion about transportation looking a little better. I don't know, Jack, do you have any more specifics on that?

You've hit most of it, Craig. Aerospace and tooling demand has picked up a little bit, common alloy sheet metals, their businesses seem to be looking better. The rod and cable business is picking up a little bit, and I think that the plus the fact that scrap is tightening in the market. So I think it's a combination of both.

A lot of scrap has been going to China as I understand it, which has tightened up the U.S. market.

Thanks.

Yep.

There's a question from Bruce Klein with CSFB.

Just a follow up. The alumina that you have to buy on the outside, did you guys tell us who the supplier was and whether they're back up, and secondly the Midwest premium, has that changed? 3.5 cents, 4 cents, I don't recall where it was the first half. Lastly, the net debt number was -- had moved more than I expected, I guess it was down I think $26 million. I didn't really get that from just looking at the major cash flow items.

I don't think the debt was down a significant amount.

No payments were made on the debt during the quarter. [multiple speakers]

Net of cash.

In terms of the Midwest premium, it had a fairly weak spot in the second quarter as I recall. It has come back to what has been more – third quarter sorry, has come back to what has been more traditional in recent years, which is ranging from 3.5 to 4 cents, pushing 4 most likely. And what was the first question?

Good question. The alumina supplier who --

No, we didn't. But it was Gramercy and it was very, very short outage. They came back within a week and it was a relatively small amount of alumina. But we did really more out of I think being careful. We did decide to cover to make sure there wasn't any longer period of a problem which it turned out not to be and make sure we had more than ample alumina available.

There is a question from Michael Morrisroe from Bear, Stearns.

Thank you. Just to clarify, David, in '05, I believe you stated you're hedged on the alumina side for about 25% of your supply. Would that imply that you're exposed to either the spot market or you're going to need to acquire some contracted prices for the remaining 75%? Can you just clarify that please?

Sure, let me clarify that. All of our alumina contracts are a percentage of LME, so they act as a natural hedge with all of our capacity for 25% of our production. We have no forward sales in 2005. So if you will, we're naturally hedged by our alumina contracts, which again are a percentage of the LME.

But we are 100% covered for alumina in 2005, which I think you misunderstood David's original comment. We are fully covered on alumina and it's all priced against the LME, so that generates the hedge he's discussed.

Tony Rizzuto, just a follow-up. The percentage of LME, the index, is that fixed or is that variable?

A percentage is fixed.

That's fixed for the duration of this multi-year contract?

Yes. We have more than one contract but yes, in each case, the percentage itself is fixed.

So you had a disruption. What was the -- I'm sorry to repeat that. I just walked in right now, but what was the magnitude of the disruption at Gramercy?

It was less than a week.

We purchased on the open market over 35 million pounds, Tony.

Thank you very much.

We have a question from Dan [Gagliardo] with Oppenheimer Funds.

Good afternoon.

Good afternoon.

What is the current availability under your revolver taking into consideration the covenants?

We have availability of about $50-60 million dollars currently.

What is your expectation on capital expenditures for both the fourth quarter as well as 2004?

We expect that -- we traditionally spend more the fourth quarter than the previous three quarters. We expect to be close to $20 million this year and we expect to be around $20 million for next year.

Okay, thank you.

And we have a question from David Brooks from American Metal Markets.

Hi there. I don’t want to press the issue, are you specifically looking at Kaiser's aluminum assets, and are you limited in this by your wanting to do an equity deal only?

We don't comment on what we're specifically looking at. And I guess that's really the only way to answer your question.

All right.

We have a question from Brett Levy from Royal Bank of Canada.

Can you just review for folks how far out all your electricity contracts go and for what period they're fixed?

We have through 2010 I believe at Hawesville, and most of that is fixed, not 100% of it. Mt. Holly we -- 2015. And that's all fixed except for a slight field adjustment, I'm sorry -- Gerry go ahead.

Mt. Holly is fixed through 2010. The contract will be subject to applicable schedules 2011 through 2015. And then Ravenswood is fixed through 2005.

Don't we have an extension? Okay. Yes, that take care of your question?

We have no further questions.

No further questions. All right, well, thank you very much for your interest and for listening in. Hopefully, we're going to see continuing improvement both in the U.S. and world economy, which will result in improvement in the commodity markets in general, and our piece of the commodity world. Certainly, we've seen in recent months a much, much more positive view about commodities in general. We think some of what's going on now and some of what we still see in China and places like that with a lot of development, that this does bode well for our participation and for the aluminum industry. We look forward to being able to not only participate that -- in that, but to achieve some of the objectives we have stated to you in the past. We'll look forward to speaking to you -- speaking with you on the next conference call. Thank you.

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